UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2007
Commission file number 000-04217
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ACETO CORPORATION
(Exact name of registrant as specified in its charter)
New York 11-1720520
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Hollow Lane, Lake Success, NY 11042
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(Address of principal executive offices)
(516) 627-6000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock, Par Value $.01 Per Share The NASDAQ Global Select Market
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(Title of Class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 of Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the voting stock of the Company held by
non-affiliates of the Company as of December 31, 2006 was approximately
$207,307,261.
The Registrant has 24,333,503 shares of common stock outstanding as of September
4, 2007.
Documents incorporated by reference: The information required in response to
Part III of this Annual Report on Form 10-K is hereby incorporated by reference
to the specified portions of the Registrant's definitive proxy statement for the
annual meeting of shareholders to be held on December 6, 2007.
2
ACETO CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2007
TABLE OF CONTENTS
PART I. 4
Item 1. Business 4
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 11
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II. 13
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 13
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 27
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 28
Item 9A. Controls and Procedures 28
Item 9B. Other Information 31
PART III. 31
Item 10. Directors, Executive Officers and Corporate Governance 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 31
Item 13. Certain Relationships and Related Transactions and
Director Independence 31
Item 14. Principal Accountant Fees and Services 31
PART IV. 31
Item 15. Exhibits and Financial Statement Schedules 31
Signatures 64
PART I
CAUTIONARY STATEMENT RELATING TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K and the information incorporated by reference
includes "forward-looking statements" within the meaning of section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
We intend those forward looking-statements to be covered by the safe harbor
provisions for forward-looking statements. All statements regarding our expected
financial position and operating results, our business strategy, our financing
plans and the outcome of any contingencies are forward-looking statements. Any
such forward-looking statements are based on current expectations, estimates,
and projections about our industry and our business. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
or variations of those words and similar expressions are intended to identify
such forward-looking statements. Forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ materially from
those stated in or implied by any forward-looking statements. Factors that could
cause actual results to differ materially from forward-looking statements
include, but are not limited to, unforeseen environmental liabilities,
international military conflicts, the mix of products sold and their profit
margins, order cancellation or a reduction in orders from customers, competitive
product offerings and pricing actions, an inability to continue to license
technology needed to sell certain of our crop protection products, the
availability and pricing of key raw materials, dependence on key members of
management, risks of entering into new European markets, and economic and
political conditions in the United States and abroad.
NOTE REGARDING DOLLAR AMOUNTS
In this Annual Report, all dollar amounts are expressed in thousands, except
share prices and per-share amounts.
ITEM 1. BUSINESS
GENERAL
Aceto Corporation, together with its consolidated subsidiaries, are referred to
herein collectively as "Aceto", "Company", "we", "us", and "our" unless the
content indicates otherwise. Aceto was incorporated in 1947 in the State of New
York. We are a global leader in the sourcing, regulatory support, marketing and
distribution of chemically derived pharmaceuticals, biopharmaceuticals,
specialty chemicals and crop protection products. Our business is organized
along product lines into three principal segments: Health Sciences, Chemicals &
Colorants and Crop Protection.
The Health Sciences segment is our largest segment in terms of both sales and
gross profits. Products that fall within this segment include active
pharmaceutical ingredients (API's), pharmaceutical intermediates, nutritionals
and biopharmaceuticals. In fiscal 2007, we entered the market for finished
dosage form generic drugs when we received orders for our first Aceto branded
product, Isoflurane.
We typically partner with both customers and suppliers years in advance of a
drug coming off patent to provide the generic equivalent. We believe we have a
pipeline of new API's poised to reach commercial levels over the coming years as
the patents on existing drugs expire, both in the United States and Europe. In
addition, we continue to explore opportunities to provide a second-source option
for existing generic drugs with approved abbreviated new drug applications
(ANDA's). The opportunities that we are looking for are to supply the API's for
the more mature generic drugs where pricing has stabilized following the
dramatic decreases in price that these drugs experienced after coming off
patent. As is the case in the generic industry, the entrance into the market of
other generic competition generally has a negative impact on the pricing of the
affected products.
By leveraging our worldwide sourcing and regulatory capabilities, we believe we
can be an alternative lower cost, second-source provider of existing API's to
generic drug companies.
Looking at worldwide pharmaceutical sales, and using that as a proxy for our
Health Sciences business segment, in calendar 2006, the industry experienced
total market growth of $42 billion, or a 7% increase. About one half of this
growth originated from the US market where the growth rate of 8.3% reflected the
impact of the first year of the Medicare Part D benefit.
The Chemicals & Colorants segment is a major supplier to the many different
industries that require outstanding performance from chemical raw materials and
additives. Products that fall within this segment include intermediates for
dyes, pigments and agrochemicals. We provide chemicals used to make plastics,
surface coatings, textiles, lubricants, flavors and fragrances.
4
Many of Aceto's raw materials are also used in high-tech products like high-end
electronic parts (circuit boards and computer chips) and binders for specialized
rocket fuels. Aceto is currently responding to the changing needs of our
customers in the color producing industry by taking our resources and knowledge
downstream as a supplier of select organic pigments. We expect that continued
global Gross Domestic Product growth will drive higher demand for the chemical
industry, especially in China and other emerging regions of the world. With
supply growth limited, we expect that industry supply/demand balances will
remain favorable. However, continued volatility in energy costs will add
uncertainty to our profit outlook.
According to the American Chemistry Council, the global chemical industry still
appears to be in an expansionary mode although leading indicators of global
industrial production suggest that the current growth cycle may have peaked.
Overall, on a year-over-year basis, global chemical industry production
increased by 4.4%.
The Crop Protection segment sells herbicides, pesticides, and other agricultural
chemicals to customers, primarily located in the United States and Western
Europe. Our joint venture with Nufarm, which markets Butoxone(R), increased our
market share of the peanut, soybean and alfalfa herbicide markets. In fiscal
2007, we entered into a multi-year contract with a major agricultural chemical
distributor and launched generic Asulam, an herbicide for sugar cane and the
first generic registration that Aceto has received. Our plan is to develop over
time a pipeline of additional products in a similar manner. The Crop Protection
segment was formerly reported as the Agrochemical segment with the name change
effected on December 31, 2006.
According to the US Department of Agriculture, total acreage planted in 2007
increased by 1.3% to slightly more than 320 million acres. The number of peanut
acres planted in 2007 was down 4.5% from 2006 levels, sugarcane acreage was down
0.7% from 2006 and potato acres planted in 2007 were down 3.6% from 2006 levels.
Our main business strengths are sourcing, regulatory support, quality control,
marketing and distribution. With a physical presence in ten countries, we
distribute over 1000 chemicals and pharmaceuticals used principally as raw
materials in the pharmaceutical, agricultural, color, surface coating/ink and
general chemical consuming industries. We believe that we are currently the
largest buyer of pharmaceutical and specialty chemicals for export from China,
purchasing from over 500 different manufacturers.
Our presence in China, Germany, France, the Netherlands, Singapore, India,
Poland, Hong Kong, the United Kingdom and the United States, along with
strategically located warehouses worldwide, enable us to respond quickly to
demands from customers worldwide, assuring that a consistent, high-quality
supply of pharmaceutical, biopharmaceutical, specialty chemicals and crop
protection products are readily accessible. We are able to offer our customers
competitive pricing, continuity of supply, and quality control. We believe our
60 years of experience, our reputation for reliability and stability, and our
long-term relationships with suppliers have fostered loyalty among our
customers.
We remain confident about our business prospects. We anticipate continued
organic growth which will be enhanced through our plans to enter the market for
companion animal vaccines, the market for finished dosage form generic drugs,
the Japanese pharmaceutical market, the continued globalization of our Chemicals
& Colorants business, the further expansion of our crop protection segment by
acquisition of product lines and intellectual property, the continued
enhancement of our sourcing operations in China and India, and the steady
improvement of our regulatory capabilities.
We believe our track record of continuous product introductions demonstrates
that Aceto has come to be recognized by the worldwide generic pharmaceutical
industry as an important, reliable supplier. Our plans involve seeking strategic
acquisitions that enhance our earnings and forming alliances with partners that
add to our capabilities, when possible.
Information concerning revenue and gross profit attributable to each of our
reportable segments is found in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and in Note 19 to
the Consolidated Financial Statements, Part II, Item 8, "Financial Statements
and Supplementary Data."
PRODUCTS AND CUSTOMERS
During the fiscal years ended June 30, 2007 and 2006, approximately 65% and 67%,
respectively, of our purchases were from Asia and approximately 21% were from
Europe.
Our customers are primarily located throughout the United States, Europe and
Asia. They include a wide range of companies in the industrial chemical,
agricultural, and health science industries, and range from small trading
companies to Fortune 500 companies. During fiscal years 2007 and 2006, sales
made to customers in the United States totaled $153,147 and $157,527,
5
respectively. Sales made to customers outside the United States during fiscal
years 2007 and 2006 totaled $160,326 and $139,801, respectively, of which,
approximately 58% and 53%, respectively, were to customers located in Europe.
The chemical industry is highly competitive. We compete by offering high-quality
products produced around the world by both large and small manufacturers at
attractive prices. Because of our long standing relationships with many
suppliers as well as our sourcing operations in both China and India, we are
able to ensure that any given product is manufactured at a facility that is
appropriate for that product. For the most part, we store our inventory of
chemicals in public warehouses strategically located throughout the United
States, Europe, and Asia, and we can therefore fill orders rapidly from
inventory. We have developed ready access to key purchasing, research, and
technical executives of our customers and suppliers. This allows us to ensure
that when necessary, sourcing decisions can be made quickly.
No single product or customer accounted for as much as 10% of net sales in
fiscal years 2007, 2006 or 2005. No single supplier accounted for as much as 10%
of purchases in fiscal 2007 and 2006. Two suppliers accounted for approximately
13% and 12% of purchases in fiscal year 2005.
We hold no patents, licenses, franchises or concessions that we consider
material to our operations.
Our subsidiary Aceto Agricultural Chemicals Corp. ("Aceto Agricultural")
markets, and contracts for the manufacture of, certain crop protection products
that are subject to the Federal Insecticide, Fungicide and Rodenticide Act
("FIFRA"). Under FIFRA, companies that wish to market pesticides must provide
test data to the Environmental Protection Agency ("EPA") to register, obtain and
maintain approved labels for those pesticides. The EPA requires that follow-on
registrants of these products, on a basis prescribed in the FIFRA regulations,
compensate the initial registrant for the cost of producing the necessary test
data. Follow-on registrants do not themselves generate or contract for the data.
However, when FIFRA requirements mandate that new test data be generated to
enable all registrants to continue marketing a pesticide product, often both the
initial and follow-on registrants establish a task force to jointly undertake,
and pay for, the testing effort. We are currently a member of three such task
force groups and historically, our payments have been in the range of $250 -
$500 per year. We may be required to make such additional payments in the
future.
EMPLOYEES
At June 30, 2007, we had 224 employees, none of whom were covered by a
collective bargaining agreement.
ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors and other information
included in this Annual Report. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties not currently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risk factors occur, our business, financial
condition, operating results and cash flows could be materially adversely
affected.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR COMPETITORS, MANY OF WHICH HAVE
GREATER MARKET PRESENCE AND RESOURCES THAN US, OUR PROFITABILITY AND FINANCIAL
CONDITION WILL BE ADVERSELY AFFECTED.
Our financial condition and operating results are directly related to our
ability to compete in the intensely competitive worldwide chemical market. We
face intense competition from global and regional distributors of chemical
products, many of which are large chemical manufacturers as well as
distributors. Many of these companies have substantially greater resources than
us, including greater financial, marketing and distribution resources. We cannot
assure you that we will be able to compete successfully with any of these
companies. In addition, increased competition could result in price reductions,
reduced margins and loss of market share for our services, all of which would
adversely affect our business, results of operations and financial condition.
WE MAY INCUR SIGNIFICANT UNINSURED ENVIRONMENTAL AND OTHER LIABILITIES INHERENT
IN THE CHEMICAL DISTRIBUTION INDUSTRY THAT WOULD HAVE A NEGATIVE EFFECT ON OUR
FINANCIAL CONDITION.
The business of distributing chemicals is subject to regulation by numerous
federal, state, local, and foreign governmental authorities. These regulations
impose liability for loss of life, damage to property and equipment, pollution
and other environmental damage that may occur in our business. Many of these
regulations provide for substantial fines and remediation costs in the event of
chemical spills, explosions and pollution. While we believe that we are in
substantial compliance with all current laws and regulations, we can give no
assurance that we will not incur material liabilities that exceed our insurance
coverage or that such insurance will remain available on terms and at rates
acceptable to us.
6
Additionally, if existing environmental and other regulations are changed, or
additional laws or regulations are passed, the cost of complying with those laws
may be substantial, thereby adversely affecting our financial performance.
In May 2007, February 2007 and September 2006, the Company received letters from
the Pulvair Site Group, a group of potentially responsible parties ("PRP Group")
who are working with the State of Tennessee (the "State") to remediate a
contaminated property in Tennessee called the Pulvair site. The PRP Group has
alleged that one of Aceto's subsidiaries shipped hazardous substances to the
site which were released into the environment. The State had begun
administrative proceedings against the members of the PRP group and Aceto with
respect to the cleanup of the Pulvair site and the group has begun to undertake
cleanup. The PRP Group is seeking a settlement of approximately $2,100 from the
Company for its share to remediate the site contamination. Although the Company
acknowledges that its subsidiary shipped materials to the site for formulation
over twenty years ago, the Company believes that the evidence does not show that
the hazardous materials sent by Aceto's subsidiary to the site have
significantly contributed to the contamination of the environment. Accordingly,
the Company believes that the settlement offer is unreasonable. Alternatively,
counsel to the PRP Group has proposed that Aceto's subsidiary join it as a
participating member and pay 3.16% of the PRP Group's cost. The Company believes
that this percentage is high because it is based on the total volume of
materials that Aceto's subsidiary sent to the site, most of which were
non-hazardous substances and as such, believes that its subsidiary is a very
minor contributor to the site contamination. The impact of the resolution of
this matter on the Company's results of operations in a particular reporting
period is not known. However, management believes that the ultimate outcome of
this matter will not have a material adverse effect on the Company's financial
condition or liquidity.
Our subsidiary, Arsynco, has environmental remediation obligations in connection
with its former manufacturing facility in Carlstadt, New Jersey. Estimates of
how much it would cost to remediate environmental contamination at this site
have increased since the facility was closed in 1993. If the actual costs are
significantly greater than estimated, it could have a material adverse effect on
our financial condition, operating results and cash flows.
In March 2006, also related to its former manufacturing facility in Carlstadt,
New Jersey, Arsynco received notice from the EPA of its status as a potentially
responsible party ("PRP") under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) for a site described as the Berry's
Creek Study Area. Arsynco is one of over 150 PRP's which have potential
liability for the required investigation and remediation of the site. The
estimate of the potential liability is not quantifiable for a number of reasons,
including the difficulty in determining the extent of contamination and the
length of time remediation may require. In addition, any estimate of liability
must also consider the number of other potentially responsible parties and their
financial strength. Since an amount of the liability can not be reasonably
estimated at this time, no accrual is recorded for these potential future costs.
The impact of the resolution of this matter on the Company's results of
operations in a particular reporting period is not known. However, management
believes that the ultimate outcome of this matter will not have a material
adverse effect on the Company's financial condition or liquidity.
THE DISTRIBUTION AND SALE OF OUR PRODUCTS ARE SUBJECT TO PRIOR GOVERNMENTAL
APPROVALS AND THEREAFTER ONGOING GOVERNMENTAL REGULATION.
Our products are subject to laws administered by federal, state and foreign
governments, including regulations requiring registration and approval of many
of our products. More stringent restrictions could make our products less
desirable, which would adversely affect our revenues and profitability. Some of
our products are subject to the EPA registration and re-registration
requirements, and are registered in accordance with FIFRA. Such registration
requirements are based, among other things, on data demonstrating that the
product will not cause unreasonable adverse effects on human health or the
environment when used according to approved label directions. Governmental
regulatory authorities have required, and may require in the future, that
certain scientific data requirements be performed on our products and this may
require us on our behalf or in joint efforts with other registrants to perform
additional testing. Responding to such requirements may cause delays in or the
cessation of the sales of one or more of our products which would adversely
affect our profitability. We can provide no assurance that any testing approvals
or registrations will be granted on a timely basis, if at all, or that our
resources will be adequate to meet the costs of regulatory compliance or that
the economic benefit of complying with the requirement will exceed our cost.
ASSESSMENTS BY VARIOUS TAX AUTHORITIES MAY BE MATERIALLY DIFFERENT THAN THE
AMOUNTS WE HAVE PROVIDED FOR IN OUR CONSOLIDATED FINANCIAL STATEMENTS.
We are regularly audited by federal, state, and foreign tax authorities. From
time to time, these audits may result in proposed assessments. While we believe
that we have adequately provided for any such assessments, future settlements
may be materially different than we have provided for and thereby adversely
affect our earnings and cash flows.
7
We operate in various tax jurisdictions, and although we believe that we have
provided for income and other taxes in accordance with the relevant regulations,
if the applicable regulations were ultimately interpreted differently by a
taxing authority, we may be exposed to additional tax liabilities.
IF WE ARE UNABLE TO CONTINUE TO USE LICENSED TECHNOLOGY THAT WE RELY ON TO
CONDUCT OUR CROP PROTECTION BUSINESS, OUR PROFITABILITY AND FINANCIAL CONDITION
WILL BE ADVERSELY AFFECTED.
We cannot assure you that we will be able to continue to license the technology
that we currently rely on in order to sell certain of our crop protection
products. An inability to license this technology could prevent us from
continuing to sell the products and, in turn, materially adversely affect our
profitability and financial condition. We may also incur substantial costs in
seeking enforcement of our rights related to our licensed technologies.
One of the Company's crop protection products is subject to certain licensed
technology, which expired in August 2007. The Company has commenced a lawsuit
against the owner of the patent license bringing claims based on antitrust and
breach of contract and related claims. The Company intends to pursue these
claims vigorously in order to continue to license the technology and sell the
particular crop protection product.
OUR ACQUISITION STRATEGY IS SUBJECT TO A NUMBER OF INHERENT RISKS, INCLUDING THE
RISK THAT OUR ACQUISITIONS MAY NOT BE SUCCESSFUL.
We continually seek to expand our business through acquisitions of other
companies that complement our own and through joint ventures, licensing
agreements and other arrangements. Any decision regarding strategic alternatives
would be subject to inherent risks, and we cannot guarantee that we will be able
to identify the appropriate opportunities, successfully negotiate economically
beneficial terms, successfully integrate any acquired business, retain key
employees, or achieve the anticipated synergies or benefits of the strategic
alternative selected. Acquisitions can require significant capital resources and
divert our management's attention from our existing business. Additionally, we
may issue additional shares in connection with a strategic transaction, thereby
diluting the holdings of our existing common shareholders, incur debt or assume
liabilities, become subject to litigation, or consume cash, thereby reducing the
amount of cash available for other purposes.
ANY ACQUISITION THAT WE MAKE COULD RESULT IN A SUBSTANTIAL CHARGE TO OUR
EARNINGS.
We have previously incurred charges to our earnings in connection with
acquisitions, and may continue to experience charges to our earnings for any
acquisitions that we make, including large and immediate write-offs of acquired
assets, or impairment charges. These costs may also include substantial
severance and other closure costs associated with eliminating duplicate or
discontinued products, employees, operations and facilities. These charges could
have a material adverse effect on our results of operations for particular
quarterly periods and they could possibly have an adverse impact on the market
price of our common stock.
OUR REVENUE STREAM IS DIFFICULT TO PREDICT.
Our revenue stream is difficult to predict because it is primarily generated as
customers place orders and customers can change their requirements or cancel
orders. Many of our sales orders are short-term and may be cancelled at any
time. As a result, much of our revenue is not recurring from period to period,
which contributes to the variability of our results from period to period. We
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance.
OUR OPERATING RESULTS MAY FLUCTUATE IN FUTURE QUARTERS, WHICH MAY ADVERSELY
AFFECT THE TRADING PRICE OF OUR COMMON STOCK.
Our operating results will fluctuate on a quarterly basis as a result of a
number of factors, including the timing of contracts, the delay or cancellation
of a contract, and changes in government regulations. Any one of these factors
could have a significant impact on our quarterly results. In some quarters, our
revenue and operating results may fall below the expectations of securities
analysts and investors, which would likely cause the trading price of our common
stock to decline.
FAILURE TO OBTAIN PRODUCTS FROM OUTSIDE MANUFACTURERS COULD ADVERSELY AFFECT OUR
ABILITY TO FULFILL SALES ORDERS TO OUR CUSTOMERS.
We rely on outside manufacturers to supply products for resale to our customers.
Manufacturing problems may occur with these and other outside sources. If such
problems occur, we cannot ensure that we will be able to deliver our products to
our customers profitably or on time.
8
OUR POTENTIAL LIABILITY ARISING FROM OUR COMMITMENT TO INDEMNIFY OUR DIRECTORS,
OFFICERS AND EMPLOYEES COULD ADVERSELY AFFECT OUR EARNINGS AND FINANCIAL
CONDITION.
We have committed in our bylaws to indemnify our directors, officers and
employees against the reasonable expenses incurred by these persons in
connection with an action brought against him or her in such capacity, except in
matters as to which he or she is adjudged to have breached a duty to us. The
maximum potential amount of future payments we could be required to make under
this provision is unlimited. While we have"directors and officers" insurance
policies that covers a portion of this potential exposure, we may be adversely
affected if we are required to pay damages or incur legal costs in connection
with a claim above our insurance limits.
OUR BUSINESS MAY GIVE RISE TO PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE
OR INDEMNITY AGREEMENTS.
The marketing, distribution and use of chemical products involves substantial
risk of product liability claims. A successful product liability claim that we
have not insured against, that exceeds our levels of insurance or that we are
not indemnified for may require us to pay a substantial amount of damages. In
the event that we are forced to pay such damages, this payment may have a
material adverse effect on our financial and operating results.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY TERRORIST ACTIVITIES.
Our business depends on the free flow of products and services through the
channels of commerce. Instability due to military, terrorist, political and
economic actions in other countries could materially disrupt our overseas
operations and export sales. In fiscal years 2007 and 2006, approximately 53%
and 47%, respectively, of our revenues were attributable to operations conducted
abroad and to sales generated from the United States to foreign countries. In
addition, in fiscal year 2007, approximately 65% and 21% of our purchases came
from Asia and Europe, respectively. In addition, in certain countries where we
currently operate or export, intend to operate or export, or intend to expand
our operations, we could be subject to other political, military and economic
uncertainties, including labor unrest, restrictions on transfers of funds and
unexpected changes in regulatory environments.
FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES MAY ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS AND FINANCIAL CONDITION.
A substantial portion of our revenue is denominated in currencies other than the
U.S. dollar because certain of our foreign subsidiaries operate in their local
currencies. Our results of operations and financial condition may therefore be
adversely affected by fluctuations in the exchange rate between foreign
currencies and the U.S. dollar.
WE RELY HEAVILY ON KEY EXECUTIVES FOR OUR FINANCIAL PERFORMANCE.
Our financial performance is highly dependent upon the efforts and abilities of
our key executives. The loss of the services of any of our key executives could
therefore have a material adverse effect upon our financial position and
operating results. None of our key executives has an employment agreement with
us and we do not maintain "key-man" insurance on any of our key executives.
VIOLATIONS OF CGMP AND OTHER GOVERNMENT REGULATIONS COULD HAVE A MATERIAL
ADVERSE AFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
All facilities and manufacturing techniques used to manufacture products for
clinical use or for commercial sale in the United States must be operated in
conformity with current Good Manufacturing Practices ("cGMP") regulations as
required by the FDA. Our suppliers' facilities are subject to scheduled periodic
regulatory and customer inspections to ensure compliance with cGMP and other
requirements applicable to such products. A finding that we had materially
violated these requirements could result in one or more regulatory sanctions,
loss of a customer contract, disqualification of data for client submissions to
regulatory authorities and a mandated closing of our suppliers' facilities,
which in turn could have a material adverse effect on our business, financial
condition and results of operations.
LITIGATION MAY HARM OUR BUSINESS AND OUR MANAGEMENT AND FINANCIAL RESOURCES.
Substantial, complex or extended litigation could cause us to incur large
expenditures and could distract our management. For example, lawsuits by
employees, stockholders, collaborators, distributors, customers, or end-users of
our products or services could be very costly and substantially disrupt our
business. Disputes from time to time with such companies or
9
individuals are not uncommon, and we cannot assure you that we will always be
able to resolve such disputes out of court or on favorable terms.
THE MARKET PRICE OF OUR STOCK COULD BE VOLATILE.
The market price of our common stock has been subject to volatility and may
continue to be volatile in the future, due to a variety of factors, including:
o quarterly fluctuations in our operating income and earnings per
share results
o technological innovations or new product introductions by us or
our competitors
o economic conditions
o disputes concerning patents or proprietary rights
o changes in earnings estimates and market growth rate projections
by market research analysts
o sales of common stock by existing security holders
o loss of key personnel
o securities class actions or other litigation
The market price for our common stock may also be affected by our ability to
meet analysts' expectations. Any failure to meet such expectations, even
slightly, could have an adverse effect on the market price of our common stock.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of these companies.
INCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS.
Portions of our operations require the controlled use of hazardous materials.
Although we are diligent in designing and implementing safety procedures to
comply with the standards prescribed by federal, state, and local regulations,
the risk of accidental contamination of property or injury to individuals from
these materials cannot be completely eliminated. In the event of such an
incident, we could be liable for any damages that result, which could adversely
affect our business.
THERE ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND
ASSUMPTIONS USED IN PREPARING FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. ANY CHANGES IN THE ESTIMATES,
JUDGMENTS AND ASSUMPTIONS WE USE COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
FINANCIAL POSITION AND RESULTS OF OPERATIONS.
The consolidated financial statements included in the periodic reports we file
with the SEC are prepared in accordance with U.S. generally accepted accounting
principles ("GAAP"). Preparing financial statements in accordance with GAAP
involves making estimates, judgments and assumptions that affect reported
amounts of assets, liabilities, revenues, expenses and income. Estimates,
judgments and assumptions are inherently subject to change, and any such changes
could result in corresponding changes to the reported amounts.
FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404
OF THE SARBANES-OXLEY ACT COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS AND STOCK
PRICE.
Section 404 of the Sarbanes-Oxley Act requires us to evaluate annually the
effectiveness of our internal controls over financial reporting as of the end of
each fiscal year and to include a management report assessing the effectiveness
of our internal controls over financial reporting in our annual report. Section
404 also requires our independent registered public accounting firm to report on
our internal controls over financial reporting. If we fail to maintain the
adequacy of our internal controls, we cannot assure you that we will be able to
conclude in the future that we have effective internal controls over financial
reporting. If we fail to maintain effective internal controls, we might be
subject to sanctions or investigation by regulatory authorities, such as the
Securities and Exchange Commission or NASDAQ. Any such action could adversely
affect our financial results and the market price of our common stock and may
also result in delayed filings with the Securities and Exchange Commission.
AVAILABLE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and other
information with the U.S. Securities and Exchange Commission. You may read and
copy any document we file at the SEC's public reference room at Room 1024, 450
Fifth Street, NW, Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330
for information on the public reference
10
room. The SEC maintains a website that contains annual, quarterly, and current
reports, proxy statements, and other information that issuers (including Aceto)
file electronically with the SEC. The SEC's website is WWW.SEC.GOV.
Our website is WWW.ACETO.COM. We make available free of charge through our
Internet site, via a link to the SEC's website at WWW.SEC.GOV, our annual
reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form
8-K; Forms 3, 4 and 5 filed on behalf of our directors and executive officers;
and any amendments to those reports and forms. We make these filings available
as soon as reasonably practicable after they are electronically filed with, or
furnished to, the SEC. The information on our website is not incorporated by
reference into this Annual Report.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our general headquarters and main sales office occupy approximately 26,000 gross
square feet of leased space in an office building in Lake Success, New York. The
lease expires in April 2011.
Arsynco's former manufacturing facility is located on a 12-acre parcel in
Carlstadt, New Jersey, that it owns. This parcel contains one building with
approximately 5,000 gross square feet of office space.
In November 2004, we purchased approximately 1,300 gross square meters of office
space located in Shanghai, China for our sales offices and investment purposes.
We also lease office space in Hamburg, Germany; Dusseldorf, Germany; Heemskerk,
the Netherlands; Paris, France; Lyon, France; Singapore; Warsaw, Poland and
Mumbai, India. These offices are used for sales and administrative purposes.
We believe that our properties are generally well maintained, in good condition
and adequate for our present needs.
ITEM 3. LEGAL PROCEEDINGS.
We are subject to various claims that have arisen in the normal course of
business. We do not know what impact the final resolution of these matters will
have on our results of operations in a particular reporting period. We believe,
however, that the ultimate outcome of such matters will not have a material
adverse effect on our financial condition or liquidity.
In May 2007, February 2007 and September 2006, the Company received letters from
the Pulvair Site Group, a group of potentially responsible parties ("PRP Group")
who are working with the State of Tennessee (the "State") to remediate a
contaminated property in Tennessee called the Pulvair site. The PRP Group has
alleged that one of Aceto's subsidiaries shipped hazardous substances to the
site which were released into the environment. The State had begun
administrative proceedings against the members of the PRP group and Aceto with
respect to the cleanup of the Pulvair site and the group has begun to undertake
cleanup. The PRP Group is seeking a settlement of approximately $2,100 from the
Company for its share to remediate the site contamination. Although the Company
acknowledges that its subsidiary shipped materials to the site for formulation
over twenty years ago, the Company believes that the evidence does not show that
the hazardous materials sent by Aceto's subsidiary to the site have
significantly contributed to the contamination of the environment. Accordingly,
the Company believes that the settlement offer is unreasonable. Alternatively,
counsel to the PRP Group has proposed that Aceto's subsidiary join it as a
participating member and pay 3.16% of the PRP Group's cost. The Company believes
that this percentage is high because it is based on the total volume of
materials that Aceto's subsidiary sent to the site, most of which were
non-hazardous substances and as such, believes that its subsidiary is a very
minor contributor to the site contamination. The impact of the resolution of
this matter on the Company's results of operations in a particular reporting
period is not known. However, management believes that the ultimate outcome of
this matter will not have a material adverse effect on the Company's financial
condition or liquidity.
In March 2006, Arsynco received notice from the EPA of its status as a PRP under
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) for a site described as the Berry's Creek Study Area. Arsynco is one of
over 150 PRP's which have potential liability for the required investigation and
remediation of the site. The estimate of the potential liability is not
quantifiable for a number of reasons, including the difficulty in determining
the extent of contamination and the length of time remediation may require. In
addition, any estimate of liability must also consider the number of other
potentially responsible parties and their financial strength. Since an amount of
the liability can not be reasonably estimated at this time, no accrual is
recorded for these potential future costs. The impact of the resolution of this
11
matter on the Company's results of operations in a particular reporting period
is not known. However, management currently believes that the ultimate outcome
of this matter will not have a material adverse effect on the Company's
financial condition or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of our security holders during the fourth
quarter of the fiscal year covered by this Annual Report.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on the NASDAQ Global Select Market using the symbol
"ACET." The following table states the fiscal year 2007 and 2006 high and low
sales prices of our common stock as reported by the NASDAQ Global Market for the
periods indicated.
HIGH LOW
FISCAL YEAR 2007
First Quarter $ 7.63 $ 6.54
Second Quarter 9.25 6.82
Third Quarter 9.98 7.22
Fourth Quarter 9.48 7.60
FISCAL YEAR 2006
First Quarter $ 8.20 $ 5.49
Second Quarter 6.96 5.64
Third Quarter 7.70 6.44
Fourth Quarter 8.36 6.33
Cash dividends of $0.075 per common share were paid in January 2007 and cash
dividends of $0.10 per common share were paid in June of 2007. Cash dividends of
$0.075 per common share were paid in January and June of fiscal years 2006 and
2005. Our revolving credit facility restricts the payment of cash dividends to
$4,500 per year.
As of September 4, 2007, there were 520 holders of record of our common stock.
22,172 shares of our common stock were held by the nominee of the Depository
Trust Company, the country's principal central depository. For purposes of
determining the number of owners of our common stock, those shares are
considered to be owned by one holder. Additional individual holdings in street
name result in a sizable number of beneficial owners being represented on our
records as owned by various banks and stockbrokers.
The following table states certain information with respect to our equity
compensation plans at June 30, 2007:
Number of securities
Number of securities to Weighted-average remaining available for
be issued upon exercise exercise price of future issuance under
Plan category of outstanding options outstanding options equity compensation plans
Equity compensation plans approved
by security holders 2,700 $7.58 161
Equity compensation plans not
approved by security holders - - -
-----------------------------------------------------------------------
Total 2,700 $7.58 161
PERFORMANCE GRAPH
The following graph compares on a cumulative basis the yearly percentage change,
assuming dividend reinvestment, over the last five fiscal years in (a) the total
shareholder return on our common stock with (b) the total return on the Standard
& Poor's 500 Index and (c) the total return on a published line-of-business
index - the Dow Jones U.S. Chemicals Index (the "Peer Group").
The following graph assumes that $100 had been invested in each of the Company,
the Standard & Poor's 500 Index and the Peer Group on June 30, 2002. The stock
price performance included in this graph is not necessarily indicative of future
stock price performance.
13
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG ACETO CORPORATION, THE S&P 500 INDEX
And The Dow Jones US Chemicals Index
$400 - -[-]
- - ----
$350 - - - ---
- - --[-]
$300 - - - --
[-]- - --
$250 - -- -[-] --
-- - [-]
$200 - - ------------
- .[.].
[_]__
$150 - - [_]_________
[-] _______[_][.].________..........[.]..
[_][.].......
$100 - [_]_________[_]_________...
[.]......... ......
[.]..
$ 50 -
$ 0 -
-----------------------------------------------------------------
6/02 6/03 6/04 6/05 6/06 6/07
-[-]- Aceto Corporation _[_]_ = S&P 500 Index .[.]. = Dow Jones U.S. Chemicals
ASSUMES $100 INVESTED ON JUNE 30, 2002
ASSUMES DIVIDEND REINVESTMENT
FISCAL YEAR ENDING JUNE 30, 2007
DOW JONES U.S.
ACETO CORPORATION S&P 500 INDEX CHEMICALS
----------------- ------------- --------------
June 30, 2002 100 100 100
June 30, 2003 264 100 91
June 30, 2004 380 119 115
June 30, 2005 246 127 126
June 30, 2006 232 138 134
June 30, 2007 317 166 177
14
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per-share amounts)
Fiscal Years Ended June 30, 2007 2006 2005 2004(1) 2003
--------------------------- ---- ---- ---- ---- ----
Net sales (2) $313,473 $297,328 $313,431 $296,646 $270,116
Operating income (2) 15,064 12,429 11,590 16,405 13,182
Income from continuing operations 10,212 9,264 10,625 13,111 9,522
Net income(3) 10,212 9,237 10,015 13,067 7,595
At Year End
-----------
Working capital $112,930 $104,707 $ 94,249 $ 86,420 $ 72,208
Total assets 188,478 166,592 149,028 149,697 123,519
Long-term liabilities 15,548 15,140 3,982 2,877 1,043
Shareholders' equity 124,827 115,053 107,655 100,266 84,569
Per Diluted Common Share(4)
---------------------------
Income from continuing operations $ 0.41 $ 0.38 $ 0.43 $ 0.53 $ 0.40
Net income $ 0.41 $ 0.38 $ 0.41 $ 0.53 $ 0.32
Cash dividends $ 0.175 $ 0.15 $ 0.15 $ 0.11 $ 0.10
(1) Includes the acquisition of Pharma Waldhof on December 31, 2003.
(2) Certain reclassifications have been made to fiscal 2006 and prior year
amounts included in the previously filed Form 10-K to conform to the
current year presentation.
(3) Fiscal 2003 net income includes a $1,873 charge ($0.08 per diluted
common share) for a cumulative effect of an accounting change resulting
from an impairment of goodwill.
(4) Adjusted for stock splits, effected in the form of dividends, as
appropriate.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to provide the readers of our
financial statements with a narrative discussion about our business. The MD&A is
provided as a supplement to and should be read in conjunction with our financial
statements and the accompanying notes.
We are reporting a $2,635 increase in operating profit to $15,064 for the year
ended June 30, 2007 as compared to $12,429 for the prior year. This increase in
operating profit was achieved, despite a highly competitive environment,
primarily through maintaining our profit margin and our successful management of
selling, general and administrative costs. Net sales for fiscal 2007 were
$313,473, an increase of $16,145 from fiscal 2006. This increase in net sales
also impacted our gross profit, which increased $3,535 to $54,493 for fiscal
2007. Our net income increased to $10,212, or $0.41 per diluted share, an
increase of $975 or 10.6% compared to fiscal year 2006.
Our financial position as of June 30, 2007, remains strong, as we had cash and
short-term investments of $35,356, working capital of $112,930, no long-term
debt and shareholders' equity of $124,827.
Our business is separated into three principal segments: Health Sciences,
Chemicals & Colorants and Crop Protection.
The Health Sciences segment is our largest segment in terms of both sales and
gross profits. Products that fall within this segment include API's,
pharmaceutical intermediates, nutritionals and biopharmaceuticals. In fiscal
2007, we entered the market for finished dosage form generic drugs when we
received orders for our first Aceto branded product, Isoflurane.
We typically partner with both customers and suppliers years in advance of a
drug coming off patent to provide the generic equivalent. We believe we have a
pipeline of new API's poised to reach commercial levels over the coming years as
the patents on existing drugs expire, both in the United States and Europe. In
addition, we continue to explore opportunities to
15
provide a second-source option for existing generic drugs with approved ANDA's.
The opportunities that we are looking for are to supply the API's for the more
mature generic drugs where pricing has stabilized following the dramatic
decreases in price that these drugs experienced after coming off patent. As is
the case in the generic industry, the entrance into the market of other generic
competition generally has a negative impact on the pricing of the affected
products.
By leveraging our worldwide sourcing and regulatory capabilities, we believe we
can be an alternative lower cost, second-source provider of existing API's to
generic drug companies.
The Chemicals & Colorants segment is a major supplier to the many different
industries that require outstanding performance from chemical raw materials and
additives. Products that fall within this segment include intermediates for
dyes, pigments and agrochemicals. We provide chemicals used to make plastics,
surface coatings, textiles, lubricants, flavors and fragrances. Many of Aceto's
raw materials are also used in high-tech products like high-end electronic parts
(circuit boards and computer chips) and binders for specialized rocket fuels.
Aceto is currently responding to the changing needs of our customers in the
color producing industry by taking our resources and knowledge downstream as a
supplier of select organic pigments. We expect that continued global Gross
Domestic Product growth will drive higher demand for the chemical industry,
especially in China and other emerging regions of the world. With supply growth
limited, we expect that industry supply/demand balances will remain favorable.
However, continued volatility in energy costs will add uncertainty to our profit
outlook.
The Crop Protection segment sells herbicides, pesticides, and other agricultural
chemicals to customers, primarily located in the United States and Western
Europe. Our joint venture with Nufarm, which markets Butoxone(R), increased our
market share of the peanut, soybean and alfalfa herbicide markets. In fiscal
2007, we entered into a multi-year contract with a major agricultural chemical
distributor and launched generic Asulam, an herbicide for sugar cane and the
first generic registration that Aceto has received. Our plan is to develop over
time a pipeline of additional products in a similar manner. The Crop Protection
segment was formerly reported as the Agrochemical segment with the name change
effected on December 31, 2006.
We formerly also reported under the Institutional Sanitary Supplies segment,
which included cleaning solutions, fragrances and deodorants for commercial and
industrial customers. This former segment was successfully divested from our
ongoing business during fiscal 2006.
Our main business strengths are sourcing, regulatory support, quality control,
marketing and distribution. With a physical presence in ten countries, we
distribute over 1,000 chemicals and pharmaceuticals used principally as raw
materials in the pharmaceutical, agricultural, color, surface coating/ink and
general chemical consuming industries. We believe that we are currently the
largest buyer of pharmaceutical and specialty chemicals for export from China,
purchasing from over 500 different manufacturers.
In this MD&A, we explain our general financial condition and results of
operations, including the following:
o factors that affect our business
o our earnings and costs in the periods presented
o changes in earnings and costs between periods
o sources of earnings
o the impact of these factors on our overall financial condition
As you read this MD&A, refer to the accompanying consolidated statements of
income, which present the results of our operations for the three years ended
June 30, 2007. We analyze and explain the differences between periods in the
specific line items of the consolidated statements of income.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
This discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. In
preparing these financial statements, we were required to make estimates and
assumptions that affect the amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
regularly evaluate our estimates including those related to allowances for bad
debts, inventories, goodwill and indefinite-life intangible assets, long-lived
assets, environmental and other contingencies, income taxes and stock-based
compensation. We base our estimates on various factors, including historical
experience, advice from outside subject-matter experts, and various assumptions
that we believe to be reasonable under the circumstances, which together form
the basis for our making judgments about the
16
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.
We believe the following critical accounting policies affected our more
significant judgments and estimates used in preparing these consolidated
financial statements.
REVENUE RECOGNITION
We recognize revenue from sales of any product when it is shipped and title and
risk of loss pass to the customer. We have no acceptance or other post-shipment
obligations and we do not offer product warranties or services to our customers.
Sales are recorded net of returns of damaged goods from customers, which
historically have been immaterial, and sales incentives offered to customers.
Sales incentives consist primarily of volume incentive rebates. We record volume
incentive rebates as the underlying revenue transactions that result in progress
by the customer in earning the rebate are recorded, in accordance with Emerging
Issues Task Force ("EITF") 01-09, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)."
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts relating to estimated losses
resulting from customers being unable to make required payments. Allowances for
doubtful accounts are based on historical experience and known factors regarding
specific customers and the industries in which those customers operate. If the
financial condition of our customers were to deteriorate, resulting in their
ability to make payments being impaired, additional allowances would be
required.
INVENTORIES
Inventories, which consist principally of finished goods, are stated at the
lower of cost (first-in first-out method) or market. We write down our
inventories for estimated excess and obsolete goods by an amount equal to the
difference between the carrying cost of the inventory and the estimated market
value based upon assumptions about future demand and market conditions. A
significant sudden increase in demand for our products could result in a
short-term increase in the cost of inventory purchases, while a significant
decrease in demand could result in an increase in the excess inventory
quantities on-hand. Additionally, we may overestimate or underestimate the
demand for our products which would result in our understating or overstating,
respectively, the write-down required for excess and obsolete inventory.
Although we make every effort to ensure the accuracy of our forecasts of future
product demand, any significant unanticipated changes in demand could have a
significant impact on the value of our inventory and reported operating results.
GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS
Goodwill is calculated as the excess of the cost of purchased businesses over
the value of their underlying net assets. Other indefinite-lived intangible
assets principally consist of trademarks. Goodwill and other indefinite-lived
intangible assets are not amortized.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," we test goodwill and other
indefinite-lived intangible assets for impairment on at least an annual basis.
To determine the fair value of these intangible assets, we use many assumptions
and estimates that directly impact the results of the testing. In making these
assumptions and estimates, we use industry-accepted valuation models and set
criteria that are reviewed and approved by various levels of management. If our
estimates or our related assumptions change in the future, we may be required to
record impairment charges for these assets.
LONG-LIVED ASSETS
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Identifiable
intangible assets principally consist of customer relationships, customer lists,
EPA registrations and related data, patent license and covenants not to compete.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. Recoverability of assets held for sale is measured by
comparing the carrying amount of the assets to their estimated fair value. If
such assets are considered to be impaired, the impairment to be
17
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
ENVIRONMENTAL AND OTHER CONTINGENCIES
We establish accrued liabilities for environmental matters and other
contingencies when it is probable that a liability has been incurred and the
amount of the liability can reasonably be estimated. If the contingency is
resolved for an amount greater or less than the accrual, or our share of the
contingency increases or decreases, or other assumptions relevant to the
development of the estimate were to change, we would recognize an additional
expense or benefit in income in the period that the determination was made.
TAXES
We account for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 establishes financial accounting and reporting
standards for the effects of income taxes that result from an enterprise's
activities during the current and preceding years. It requires an
asset-and-liability approach to financial accounting and reporting of income
taxes.
As of June 30, 2007, we had current net deferred tax assets of $1,656 and
non-current net deferred tax assets of $3,212. These net deferred tax assets
have been recorded based on our projecting that we will have sufficient future
earnings to realize these assets, and the net deferred tax assets have been
provided for at currently enacted income tax rates. If we determine that we will
not be able to realize a deferred tax asset, an adjustment to the deferred tax
asset will result in a reduction of net income at that time.
Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries since substantially all of these earnings are expected to be
permanently reinvested in our foreign operations. A deferred tax liability will
be recognized when we expect that we will recover those undistributed earnings
in a taxable manner, such as through receipt of dividends or sale of the
investments. Determination of the amount of the unrecognized U.S. income tax
liability is not practical because of the complexities of the hypothetical
calculation. In addition, unrecognized foreign tax credit carryforwards would be
available to reduce a portion of such U.S. tax liability.
Tax reform has taken place in Germany whereby an income tax law was passed in
July 2007, awaiting approval into the Federal Gazette. The enacted tax rate in
Germany will potentially change from 40% to 30%. As a result, the deferred tax
balance could decrease by $1,600 in 2008.
STOCK-BASED COMPENSATION
With the adoption of SFAS No. 123(R) on July 1, 2005, we are required to record
the fair value of stock-based compensation awards as an expense. In order to
determine the fair value of stock options on the date of grant, we apply the
Black-Scholes option-pricing model, including an estimate of forfeitures.
Inherent in this model are assumptions related to expected stock-price
volatility, option term, risk-free interest rate and dividend yield. While the
risk-free interest rate and dividend yield are less subjective assumptions that
are based on factual data derived from public sources, the expected stock-price
volatility and option term assumptions require a greater level of judgment which
makes them critical accounting estimates.
We use an expected stock-price volatility assumption that is based on the
historical daily price changes of the underlying stock which are obtained from
public data sources. For stock option grants issued during fiscal 2007, we used
an expected stock-price volatility of 57% based upon the historical volatility
at the time of issuance. With regard to the weighted-average option term
assumption, for stock option grants issued during fiscal 2007, we used an
expected option term assumption of 5.5 years as determined under the
"simplified" method prescribed in SEC Staff Accounting Bulletin ("SAB") No. 107.
18
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2007 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2006
NET SALES BY SEGMENT
Year ended June 30,
Comparison 2007
2007 2006 Over/(Under) 2006
-------------------- -------------------- --------------------
% of % of $ %
Segment Net Sales Total Net Sales Total Change Change
------- -------- -------- -------- -------- -------- --------
Health Sciences $170,691 54.5% $166,725 56.1% $ 3,966 2.4%
Chemicals & Colorants 123,299 39.3 110,869 37.3 12,430 11.2
Crop Protection 19,483 6.2 19,734 6.6 (251) (1.3)
-------- -------- -------- -------- -------- --------
Net sales $313,473 100.0% $297,328 100.0% $ 16,145 5.4%
======== ======== ======== ======== ======== ========
GROSS PROFIT BY SEGMENT
Year ended June 30,
Comparison 2007
2007 2006 Over/(Under) 2006
-------------------- -------------------- --------------------
Gross % of Gross % of $ %
Segment Profit Sales Profit Sales Change Change
------- -------- -------- -------- -------- -------- --------
Health Sciences $ 33,007 19.3% $ 32,313 19.4% $ 694 2.1%
Chemicals & Colorants 16,556 13.4 17,144 15.5 (588) (3.4)
Crop Protection 4,930 25.3 4,760 24.1 170 3.6
-------- -------- -------- -------- -------- --------
Segment gross profit 54,493 17.4 54,217 18.2 276 0.5
Freight and storage
costs (1) - - (3,259) (1.1) 3,259 100.0
-------- -------- -------- -------- -------- --------
Gross profit $ 54,493 17.4% $ 50,958 17.1% $ 3,535 6.9%
======== ======== ======== ======== ======== ========
(1) Prior to July 2006, certain freight and storage costs were not able to be
allocated to the segments. Effective July 2006, as a result of certain system
improvements, all freight and storage costs are allocated to a particular
segment. Therefore, the unallocated portion of certain freight and storage costs
for the year ended June 30, 2007 have now been identified to the segments as
presented above. Total Company gross profit and margin were not affected by this
change in allocation of costs. However, the comparison of gross profit by
segment will be affected by the change in allocation of these costs.
19
NET SALES
Net sales increased $16,145, or 5.4%, to $313,473 for the year ended June 30,
2007, compared with $297,328 for the prior year. We reported sales increases in
our Health Sciences and Chemicals & Colorants segments, which were partially
offset by a slight sales decrease in our Crop Protection segment.
HEALTH SCIENCES
Net sales for the Health Sciences segment increased by $3,966 for the year ended
June 30, 2007, to $170,691, which represents a 2.4% increase over net sales of
$166,725 for the prior year. The sales increase from the prior period is
primarily related to increased sales from our foreign operations of $9,229,
specifically our Germany and Singapore operations, and increased sales from the
pharmaceutical intermediates and diagnostics products of $4,365. These increases
were partially offset by a decrease from one specific generic product of $9,906
due to its normal selling pattern.
CHEMICALS & COLORANTS
Net sales for the Chemicals & Colorants segment were $123,299 for the year ended
June 30, 2007, compared to $110,869 for the prior year. This increase of $12,430
or 11.2%, over the prior period is attributable to an increase in the number of
products being offered by our foreign subsidiaries, namely Germany and
Singapore. Sales of Chemicals & Colorants by our foreign subsidiaries for the
year ended June 30, 2007 increased by $6,920 over the comparable prior year
period. The increase in sales for this segment also resulted from the increase
in sales in the coatings product group of $7,350. The increase in Chemicals and
Colorant sales is partially offset by one customer within our color-pigment and
pigment-intermediate business, whose contract expired in fiscal 2006 and
purchased $3,118 during 2006 as compared to zero in 2007. Our chemical business
is diverse in terms of products, customers and consuming markets.
CROP PROTECTION
Net sales for the Crop Protection segment decreased to $19,483 for the year
ended June 30, 2007, a decrease of $251, or 1.3%, over net sales of $19,734 for
the prior year. The overall decrease in net sales was mainly attributable to
decreases in three products of $2,955 due to the unseasonable dry weather
conditions, particularly in the southern U.S. region and the 10-20% reduction of
peanut acreage in favor of corn due to the increased demand for ethanol. These
decreases were partially offset by the launch of our Asulam product in the first
quarter of 2007 which resulted in sales of $2,802.
GROSS PROFIT
Gross profit by segment increased $3,535 to $54,493 (17.4% of net sales) for the
year ended June 30, 2007, as compared to $50,958 (17.1% of net sales) for the
prior year. The gross profit of each segment was negatively affected by the
direct allocation of certain freight and storage costs in 2007 that had been
reported as unallocated in prior years. The Company's overall gross profit and
margin were not affected but the segmental comparisons to last year have been
affected.
HEALTH SCIENCES
Health Sciences' gross profit of $33,007 for the year ended June 30, 2007, was
$694 or 2.1% higher than the prior year. This increase in gross profit was
directly attributable to the increase in the sales volume. The gross margin
declined to 19.3% in fiscal 2007 compared to a gross margin of 19.4% for the
prior fiscal year which is directly attributed to the direct allocation of
certain freight and storage charges that are not included in last year's
comparable period.
CHEMICALS & COLORANTS
Gross profit for the year ended June 30, 2007, decreased by $588, or 3.4%, over
the prior year due to the direct allocation of certain freight and storage
charges not included in last year's comparable period as well as settlement of
an anti-dumping claim of $330. Gross margin decreased from 15.5% in fiscal 2006
to 13.7% in fiscal 2007. The foreign subsidiaries, primarily Germany and
Singapore, contributed $625 or 19% more gross profit in 2007 as compared to
2006. Additionally, the coatings product group reported an increase of $723 due
to the sales increase previously mentioned above over the prior year.
20
CROP PROTECTION
Gross profit for the Crop Protection segment increased to $4,930 for the year
ended June 30, 2007, versus $4,760 for the prior year, an increase of $170 or
3.6%. The primary reason for the increase in gross profit was due to the launch
of the Asulam product. The gross profit was negatively affected by $1,028
related to the sales decline in the three products discussed earlier, which was
partially offset by lower costs to maintain our EPA registered products of $338.
UNALLOCATED FREIGHT AND STORAGE COSTS
Unallocated cost of sales was $0 for fiscal 2007 compared to $3,259 in 2006. As
a result of certain system improvements, certain freight and storage costs which
were not able to be identified to a particular segment in the prior fiscal
years, have now been included within the segments. Therefore, there are no
unallocated freight and storage costs in the current year. Total Company gross
profit and margin were not affected by this allocation. This revision will
affect the comparison of the segments' gross profits, however.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $900, or 2.3%,
to $39,429 for the year ended June 30, 2007 compared to $38,529 for the prior
year. As a percentage of sales, SG&A decreased to 12.6% for fiscal 2007 versus
13.0% for fiscal 2006. The increase in SG&A is primarily attributable to the
increase of $1,244 in personnel costs including increased bonus expenses and
additional employees, $415 increase in sales and marketing expenses, and $259
increased legal costs, partially offset by lower operating expenses of $952
resulting from the sale of one of our subsidiaries in August 2005 and a $537
charge for settlement of legal claims against one of our subsidiaries in 2006.
OPERATING INCOME
Fiscal 2007 operating income was $15,064 compared to $12,429 in the prior year,
an increase of $2,635 or 21.2%. This increase was due to the $3,535 increase in
gross profit, which was partially offset by the overall increase in SG&A
expenses of $900.
INTEREST AND OTHER INCOME, NET
Interest and other income was $532 for fiscal 2007, which represents a 44.4%
decrease from $956 in fiscal 2006. The decrease is primarily attributable to a
decrease of $409 in a government subsidy paid annually for doing business in a
free trade zone in Shanghai, China and net loss on foreign currency of $770,
partially offset by an increase in interest income of $455 due to increased
investments during the year and increased interest rates.
PROVISION FOR INCOME TAXES
The effective tax rate for fiscal 2007 increased to 33.8% from 30.1% for fiscal
2006. The increase in the effective tax rate relates primarily to increased
earnings in foreign tax jurisdictions with higher tax rates, primarily Germany.
21
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2006 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2005
NET SALES BY SEGMENT
Year ended June 30,
Comparison 2006
2006 2005 Over/(Under) 2005
-------------------- -------------------- --------------------
% of % of $ %
Segment Net Sales Total Net Sales Total Change Change
------- -------- -------- -------- -------- -------- --------
Health Sciences $166,725 56.1% $184,577 58.9% $(17,852) (9.7)
Chemicals & Colorants 110,869 37.3 104,777 33.4 6,092 5.8
Crop Protection 19,734 6.6 20,031 6.4 (297) (1.5)
Institutional Sanitary
Supplies - 4,046 1.3 (4,046) (100.0)
-------- -------- -------- -------- -------- --------
Net sales $297,328 100.0% $313,431 100.0% $(16,103) (5.1%)
======== ======== ======== ======== ======== ========
GROSS PROFIT BY SEGMENT
Year ended June 30,
Comparison 2006
2006 2005 Over/(Under) 2005
-------------------- -------------------- --------------------
Gross % of Gross % of $ %
Segment Profit Sales Profit Sales Change Change
------- -------- -------- -------- -------- -------- --------
Health Sciences $ 32,313 19.4% $ 32,886 17.8% $ (573) (1.7)%
Chemicals & Colorants 17,144 15.5 17,257 16.5 (113) (0.6)
Crop Protection 4,760 24.1 6,719 33.5 (1,959) (29.2)
Institutional Sanitary
Supplies - - 696 17.2 (696) (100.0)
-------- -------- -------- -------- -------- --------
Segment gross profit 54,217 18.2 57,558 18.4 (3,341) (5.8)
Freight and storage
costs (1) (3,259) (1.1) (4,407) (1.4) 1,148 26.0
-------- -------- -------- -------- -------- --------
Gross profit $ 50,958 17.1% $ 53,151 17.0% $ (2,193) (4.1)%
======== ======== ======== ======== ======== ========
(1) Represents certain freight and storage costs that are not allocated to a
segment.
22
NET SALES
Net sales decreased $16,103, or 5.1%, to $297,328 for the year ended June 30,
2006, compared with $313,431 for the prior year. We reported sales decreases in
our Health Sciences and Crop Protection segments, which were partially offset by
a sales increase in our Chemicals & Colorants segment.
HEALTH SCIENCES
Net sales for the Health Sciences segment decreased by $17,852 for the year
ended June 30, 2006, to $166,725, which represents a 9.7% decrease over net
sales of $184,577 for the prior year. The sales decrease from the prior period
is directly attributable to the loss of foreign business of $16,716 from two
previously launched APIs due to increased competition. The fiscal 2006 results,
net of the two lost APIs, include a sales reduction of $2,243 from our foreign
operations which was partially offset by a sales increase of $1,162 from our
domestic operations over the prior fiscal year.
CHEMICALS & COLORANTS
Net sales for the Chemicals & Colorants segment were $110,869 for the year ended
June 30, 2006, compared to $104,777 for the prior year. This increase of $6,092,
or 5.8%, over the prior period is primarily attributable to an increase in the
agricultural intermediate, food, beverage and cosmetics and coatings product
groups of $7,650 as compared to fiscal 2005. Our chemical business is diverse in
terms of products, customers and consuming markets. One customer within our
color-pigment and pigment-intermediate business purchased $3,515 less product
during fiscal 2006 as their contract had expired. This reduction was more than
offset by an increase over the prior period in domestic sales of our diverse
chemical and colorants offerings. In addition, net sales include a $1,783
increase relating to our former CDC business, primarily from sales of the
Anti-Clog product we retained.
CROP PROTECTION
Net sales for the Crop Protection segment decreased to $19,734 for the year
ended June 30, 2006, a decrease of $297, or 1.5%, over net sales of $20,031 for
the prior year. This decline over the prior year was primarily due to dry
weather conditions shortening the agricultural selling season, for our second
largest product.
GROSS PROFIT
Gross profit by segment before unallocated cost of sales (primarily storage and
certain freight costs) decreased $3,341 to $54,217 (18.2% of net sales) for the
year ended June 30, 2006, as compared to $57,558 (18.4% of net sales) for the
prior year.
HEALTH SCIENCES
Health Sciences' gross profit of $32,313 for the year ended June 30, 2006, was
$573 or 1.7% lower than the prior year. This decrease in gross profit was
directly attributable to the loss of business on two larger previously-launched
APIs in Asia of $2,373 due to significant competitive pressures as well as a
decrease in our foreign business, net of the two APIs, of $499. This lost gross
profit was partially offset by an increase in gross profit from sales increases
from our domestic business of $1,087 over the prior fiscal year. The gross
margin increased to 19.4% in fiscal 2006 compared to a gross margin of 17.8% for
the prior fiscal year due primarily to a shift in the product mix of net sales
to higher margin products during the 2006 fiscal year.
CHEMICALS & COLORANTS
Gross profit for the year ended June 30, 2006, decreased by $113, or 0.6%, over
the prior year. Gross margin decreased from 16.5% in fiscal 2005 to 15.5% in
fiscal 2006. Decreases in categories such as organic chemicals and chemical
intermediates in terms of both volume and margins were the primary reasons for
these decreases. In addition, the decrease in gross margin percentage was partly
attributable to an increased allocation of certain freight and storage costs.
CROP PROTECTION
Gross profit for the Crop Protection segment decreased to $4,760 for the year
ended June 30, 2006, versus $6,719 for the prior year, a decrease of $1,959 or
29.2%. Gross margin decreased from 33.5% in fiscal 2005 to 24.1% in fiscal 2006.
The
23
primary cause of the decrease was lower royalty payments from our foreign
customers of $652 and lower gross margins on our second highest volume product
compared to the prior fiscal year of $416. The gross profits and margins were
also negatively affected by higher costs associated with maintaining our EPA
registered products and increased rebate expenses of $339.
UNALLOCATED FREIGHT AND STORAGE COSTS
Unallocated cost of sales decreased $1,148, to $3,259 in fiscal 2006, compared
to $4,407 in the prior year, representing a 26.0% decrease. The lower costs were
mainly a result of decreased sales and shipments to customers. In addition,
certain system improvements allow previously unallocated costs to be
identifiable and included in a particular segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") decreased $3,032, or 7.3%,
to $38,529 for the year ended June 30, 2006 compared to $41,561 for the prior
year. As a percentage of sales, SG&A remained stable at 13.0% for fiscal 2006
versus 13.3% for fiscal 2005. The decrease in SG&A was primarily due to a $1,405
decrease in expenses for our former CDC business, reduced legal fees of $878, a
reduction in audit and Sarbanes-Oxley compliance costs of $428 and reduced sales
and marketing related expenses of $638. These expense reductions were partially
offset by a $537 charge for a settlement of legal claims against one of our
subsidiaries.
OPERATING INCOME
Fiscal 2006 operating income was $12,429 compared to $11,590 in the prior year,
an increase of $839 or 7.2%. This increase was due to the $3,032 decrease in
SG&A expenses, which was partially offset by the overall decrease in gross
profit of $2,193.
INTEREST AND OTHER INCOME
Interest and other income was $956 for fiscal 2006, which represents a 24.8%
decrease from $1,271 in fiscal 2005. The decrease is primarily attributable to a
net loss on foreign currency of $537 offset in part by an increase of $208 in
interest income.
PROVISION FOR INCOME TAXES
The effective tax rate for fiscal 2006 increased to 30.1% from 16.9% for fiscal
2005. The effective tax rate for fiscal 2005 included the recognition of certain
deferred tax assets for foreign net operating loss carryforwards, which
previously were fully offset by a valuation allowance in the amount of $1,263.
Excluding the recognition of the deferred tax assets, the effective tax rate for
fiscal 2005 would have been 26.8%. The increase in the effective tax rate
relates primarily to increased earnings in foreign tax jurisdictions with higher
tax rates, primarily Germany.
DISCONTINUED OPERATIONS
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-lived Assets," the results of operations for one of the subsidiaries
forming part of the Institutional Sanitary Supplies segment have been recorded
as discontinued operations in the accompanying consolidated statements of
income. The net loss from discontinued operations was $27 and $610 the fiscal
years ended 2006 and 2005, respectively. The net loss from discontinued
operations for the fiscal year ended 2005 includes a non-cash write-down of
goodwill, net of an income tax benefit, of $570.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
At June 30, 2007, we had $32,320 in cash, $3,026 in short-term investments and
only $25 in short-term bank loans.
Our cash position at June 30, 2007 decreased $1,412 from the amount at June 30,
2006. Operating activities for the year ended June 30, 2007 provided cash of
$4,163 as compared to cash provided by operations of $16,028 for the comparable
2006 period. The $4,163 was comprised of $10,212 in net income and $3,878
derived from adjustments for non-cash items, offset by a net $9,927 decrease
from changes in operating assets and liabilities. The non-cash items included
$1,791 in depreciation and amortization expense and $1,692 for the deferred
income taxes provision. Accounts receivable increased $6,973 during the year
ended June 30, 2007, due to increased sales during the fourth quarter of 2007 as
compared to the
24
fourth quarter of 2006. Inventories increased by approximately $12,565 and
accounts payable increased by $7,884 as a result of a ramp-up in orders for
products to be shipped in the first quarter of 2008 and an increase in products
in which we have decided to carry stock. Accrued expenses and other liabilities
increased $4,185 during the year ended June 30, 2007, due primarily to an
increase in accrued expenses related to a joint venture, an increase in accrued
expenses for our foreign subsidiaries related to increased sales and
profitability overseas, as well as increase in accrued compensation related to
increased performance payments, which are anticipated to be paid in the first
quarter of 2008. Other receivables increased $1,726 due to an increase in VAT
taxes receivables in our European subsidiaries, related to increased sales in
that region. Our cash position at June 30, 2006, increased $13,782 from the
amount at June 30, 2005. Operating activities provided cash of $16,028,
primarily from net income of $9,237 and a decrease in inventory of $4,909. Our
cash position at June 30, 2005, decreased $3,380 from the amount at June 30,
2004. Operating activities used cash of $771, primarily due to inventories
having been increased by $10,188 in order to take advantage of current prices in
an environment of rising prices and the anticipated revaluation of the Chinese
currency which may increase future product costs. This was partially offset by
net income of $10,015.
Investing activities for the year ended June 30, 2007 used cash of $2,591
primarily related to purchases of investments of $6,274 and purchases of
property and equipment and intangibles of $704 and $2,468, respectively,
including $2,000 for the Asulam product registration and related data filed with
the United States Environmental Protection Agency and state regulatory agencies
to support such registrations and other supporting data. The amount of cash used
for investing activities is offset in part by $6,779 of maturities of available
for sale investments. We expect capital expenditures will be between $1,000 and
$1,500 during fiscal 2008, including approximately $600 for the opening of a
facility in India. Investing activities for the year ended June 30, 2006
provided cash of $1,387, primarily as a result of proceeds from the sale of
investments of $1,799. This was partially offset by $485 of expenditures for
property and equipment. Investing activities for the year end June 30, 2005
provided cash of $486, primarily as a result of net proceeds from investments of
$4,537. This was partially offset by $4,195 of expenditures for property and
equipment, including the purchase of office space located in Shanghai, China in
the amount of $3,015.
Financing activities for the year ended June 30, 2007 used cash of $3,991
primarily from the payments of dividends of $4,257. Financing activities for the
year ended June 30, 2006 used cash of $4,009 primarily as a result of payments
of cash dividends of $3,637 and payments for purchases of treasury stock of
$581. Financing activities for the year end June 30, 2005 used cash of $3,069
primarily as a result of payments of cash dividends of $3,641 and payment of a
related party note of $500, which were partially offset by proceeds from the
exercise of stock options of $946.
CREDIT FACILITIES
We have available credit facilities with certain foreign financial institutions.
These facilities provide us with a line of credit of $19,472, as of June 30,
2007. We are not subject to any financial covenants under these arrangements.
In June 2007, we amended our revolving credit agreement with a financial
institution that expires June 30, 2010, and provides for available credit of
$10,000. At June 30, 2007, we had utilized $702 in letters of credit, leaving
$9,298 of this facility unused. Under the credit agreement, we may obtain credit
through direct borrowings and letters of credit. Our obligations under the
credit agreement are guaranteed by certain of our subsidiaries and are secured
by 65% of the capital of certain of our non-domestic subsidiaries. There is no
borrowing base on the credit agreement. Interest under the credit agreement is
at LIBOR plus 1.50%. The credit agreement contains several covenants requiring,
among other things, minimum levels of debt service and tangible net worth. We
are also subject to certain restrictive debt covenants, including covenants
governing liens, limitations on indebtedness, limitations on cash dividends,
guarantees, sale of assets, sales of receivables, and loans and investments. We
were in compliance with all covenants at June 30, 2007.
WORKING CAPITAL OUTLOOK
Working capital was $112,930 at June 30, 2007, versus $104,707 at June 30, 2006.
The increase in working capital was primarily attributable to net income during
the year. We continually evaluate possible acquisitions of or investments in
businesses that are complementary to our own, and such transactions may require
the use of cash. The Company is considering forming a joint venture in
connection with their crop protection business. The joint venture will require
us to acquire product registration costs and related data filed with the United
States Environmental Protection Agency, which could approximate $2,000 in fiscal
2008. We believe that our cash, other liquid assets, operating cash flows,
borrowing capacity and access to the equity capital markets, taken together,
provide adequate resources to fund ongoing operating expenditures and the
anticipated continuation of semi-annual cash dividends for the next twelve
months. We may obtain additional credit facilities to enhance our liquidity.
25
OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS AND CONTINGENCIES
We have no material financial commitments other than those under operating lease
agreements, letters of credit and unconditional purchase obligations. We have
certain contractual cash obligations and other commercial commitments that will
affect our short and long-term liquidity. At June 30, 2007, we had no
significant obligations for capital expenditures. At June 30, 2007, contractual
cash obligations and other commercial commitments were as follows:
Payments Due and/or
Amount of Commitment
(Expiration Per Period)
-----------------------
Less than 1-3 4-5 After
Total 1 Year Years Years 5 Years
------- ------- ------- ------- -------
Operating leases $ 5,074 $ 1,543 $ 2,544 $ 913 $ 74
Commercial letters of credit
702 702 - - -
Standby letters of credit 225 225 - - -
Unconditional purchase
obligations 71,891 67,611 4,280 - -
------- ------- ------- ------- -------
Total $77,892 $70,081 $ 6,824 $ 913 $ 74
======= ======= ======= ======= =======
Other significant commitments and contingencies include the following:
1. One of our subsidiaries markets certain crop protection products
which are subject to the Federal Insecticide, Fungicide and
Rodenticide Act ("FIFRA"). FIFRA requires that test data be
provided to the EPA to register, obtain and maintain approved
labels for pesticide products. The EPA requires that follow-on
registrants of these products compensate the initial registrant
for the cost of producing the necessary test data on a basis
prescribed in the FIFRA regulations. Follow-on registrants do
not themselves generate or contract for the data. However, when
FIFRA requirements mandate that new test data be generated to
enable all registrants to continue marketing a pesticide
product, often both the initial and follow-on registrants
establish a task force to jointly undertake the testing effort.
We are presently a member of three such task force groups and
historically, our payments have been in the range of $250 - $500
per year. We may be required to make additional payments in the
future.
2. We, together with our subsidiaries, are subject to pending and
threatened legal proceedings that have arisen in the normal
course of business. We do not know how the final resolution of
these matters will affect our results of operations in a
particular reporting period. Our management is of the opinion,
however, that the ultimate outcome of such matters will not have
a material adverse effect upon our financial condition or
liquidity.
3. In March 2006, Arsynco received notice from the EPA of its
status as a PRP under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) for a site described as
the Berry's Creek Study Area. Arsynco is one of over 150 PRP's
which have potential liability for the required investigation
and remediation of the site. The estimate of the potential
liability is not quantifiable for a number of reasons, including
the difficulty in determining the extent of contamination and
the length of time remediation may require. In addition, any
estimate of liability must also consider the number of other
potentially responsible parties and their financial strength.
Since an amount of the liability can not be reasonably estimated
at this time, no accrual is recorded for these potential future
costs. The impact of the resolution of this matter on the
Company's results of operations in a particular reporting period
is not known. However, management currently believes that the
ultimate outcome of this matter will not have a material adverse
effect on the Company's financial condition or liquidity.
26
RELATED PARTY TRANSACTIONS
Certain of our directors are affiliated with law firms that serve as our legal
counsel on various corporate matters. During fiscal years 2007, 2006 and 2005,
we incurred legal fees of $329, $315 and $215, respectively, for services
rendered to the Company by those law firms. We believe that the fees charged by
those firms were at rates comparable to rates obtainable from other firms for
similar services.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board's ("FASB") EITF issued
EITF 06-3, "How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation)." The Task Force determined that the presentation of certain
taxes on either a gross basis (included in revenues and expenses) or a net basis
(excluded from revenues) is an accounting policy decision that should be
disclosed. An entity is not required to re-evaluate its existing policies
related to taxes assessed by a governmental authority. However, an entity is
required to disclose the amounts of such taxes reported on a gross basis. The
Company has adopted EITF 06-3 and reports these taxes on a net basis.
In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48 "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement 109". FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken or expected to be
taken on a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006. Management is currently assessing the impact of FIN 48 on the
consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 establishes a common definition for fair value to
be applied to US GAAP guidance requiring use of fair value, establishes a
framework for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. Management is currently assessing the impact of SFAS No. 157
on the consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS No. 158"). SFAS
No. 158 requires that employers recognize on a prospective basis the funded
status of their defined benefit pension and other postretirement plans on their
consolidated balance sheet and recognize as a component of other comprehensive
income, net of tax, the gains or losses and prior service costs or credits that
arise during the period but are not recognized as components of net periodic
benefit cost. SFAS No. 158 also requires additional disclosures in the notes to
financial statements. The Company adopted the recognition and disclosure
provisions of this statement for the year ended June 30, 2007. The adoption of
this statement did not have a material impact on the Company's consolidated
financial position.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--including an Amendment of FASB
Statement No. 115" (" SFAS No. 159"). SFAS No. 159 allows companies the choice
to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date. The
provisions of SFAS No. 159 will be effective for fiscal years beginning after
November 15, 2007. Management is currently evaluating the impact of SFAS No. 159
on the consolidated financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS
The market risk inherent in our market-risk-sensitive instruments and positions
is the potential loss arising from adverse changes in investment market prices,
foreign currency exchange-rates and interest rates.
INVESTMENT MARKET PRICE RISK
We had short-term investments of $3,036 at June 30, 2007. Those short-term
investments consisted of government and agency securities, corporate bonds and
corporate equity securities, and they were recorded at fair value and had
exposure to price risk. If this risk is estimated as the potential loss in fair
value resulting from a hypothetical 10% adverse change in prices quoted by stock
exchanges, the effect of that risk would be $304 as of June 30, 2007. Actual
results may differ.
27
FOREIGN CURRENCY EXCHANGE RISK
In order to reduce the risk of foreign currency exchange rate fluctuations, we
hedge some of our transactions denominated in a currency other than the
functional currencies applicable to each of our various entities. The
instruments used for hedging are short-term foreign currency contracts
(futures). The changes in market value of such contracts have a high correlation
to price changes in the currency of the related hedged transactions. At June 30,
2007, we had foreign currency contracts outstanding that had a notional amount
of $13,793. The difference between the fair market value of the foreign currency
contracts and the related commitments at inception and the fair market value of
the contracts and the related commitments at June 30, 2007, was not material.
In addition, we enter into cross currency interest rate swaps to reduce foreign
currency exposure on inter-company transactions. In June 2004 we entered into a
one-year cross currency interest rate swap transaction, which expired in June
2005 when the underlying inter-company loan was repaid, and in May 2003 we
entered into a five-year cross currency interest rate swap transaction, both for
the purpose of hedging fixed-interest-rate, foreign-currency-denominated cash
flows under inter-company loans. Under the terms of these derivative financial
instruments, U.S. dollar fixed principal and interest payments to be received
under inter-company loans will be swapped for Euro denominated fixed principal
and interest payments. The change in fair value of the swaps from date of
purchase to June 30, 2007, was $(75). The gains or losses on the inter-company
loans due to changes in foreign currency rates will be offset by the gains or
losses on the swap in the accompanying consolidated statements of income. Since
our interest rate swaps qualify as hedging activities, the change in their fair
value, amounting to $161 and $42 in fiscal 2007 and 2006, respectively, is
recorded in accumulated other comprehensive income included in the accompanying
consolidated balance sheets.
We are subject to risk from changes in foreign exchange rates for our
subsidiaries that use a foreign currency as their functional currency and are
translated into U.S. dollars. These changes result in cumulative translation
adjustments, which are included in accumulated other comprehensive income
(loss). On June 30, 2007, we had translation exposure to various foreign
currencies, with the most significant being the Euro and the Chinese Renminbi.
The potential loss as of June 30, 2007, resulting from a hypothetical 10%
adverse change in quoted foreign currency exchange rates amounted to $5,791.
Actual results may differ.
INTEREST RATE RISK
Due to our financing, investing and cash-management activities, we are subject
to market risk from exposure to changes in interest rates. We utilize a balanced
mix of debt maturities along with both fixed-rate and variable-rate debt to
manage our exposure to changes in interest rates. Our financial instrument
holdings at year-end were analyzed to determine their sensitivity to interest
rate changes. In this sensitivity analysis, we used the same change in interest
rate for all maturities. All other factors were held constant. If there were an
adverse change in interest rates of 10%, the expected effect on net income
related to our financial instruments would be immaterial. However, there can be
no assurances that interest rates will not significantly affect our results of
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this Item 8 are set
forth later in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As previously reported on Form 8-K dated November 29, 2005, the Company decided
to change accountants. There were no disagreements with predecessor accountants.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) are designed to ensure that information required to be disclosed in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Our disclosure controls and
procedures are also designed to ensure that information required to be disclosed
in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive and principal
financial officer, to allow timely decisions regarding required disclosure. Our
chief executive officer and chief financial officer, with assistance
28
from other members of our management, have reviewed the effectiveness of our
disclosure controls and procedures as of June 30, 2007 and, based on their
evaluation, have concluded that the disclosure controls and procedures were
effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three
months ended June 30, 2007 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as that term is defined in Rule 13a-15(f)
under the Exchange Act. Under the supervision and with the participation of our
management, including our principal executive and principal financial officers,
we assessed, as of June 30, 2007, the effectiveness of our internal control over
financial reporting. This assessment was based on criteria established in the
framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on our assessment
using those criteria, management concluded that our internal control over
financial reporting as of June 30, 2007, was effective.
Our internal control over financial reporting as of June 30, 2007, has been
audited by BDO Seidman LLP, an independent registered public accounting firm, as
stated in their report, which is included herein.
Internal control over financial reporting is defined as a process designed by,
or under the supervision of, our principal executive and principal financial
officers and effected by our board of directors, management and other personnel
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles, and includes those policies and
procedures that:
o pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of our assets;
o provide reasonable assurance that transactions are recorded as
necessary to permit the preparation of financial statements in
accordance with U.S. generally accepted accounting principles
and that our receipts and expenditures are being made only in
accordance with authorization of our management and directors;
and
o provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the internal control
system are met. Because of the inherent limitations of any internal control
system, no evaluation of controls can provide absolute assurance that all
control issues, if any, within a company have been detected.
29
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
Aceto Corporation:
We have audited Aceto Corporation's internal control over financial reporting as
of June 30, 2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Aceto Corporation's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Aceto Corporation maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2007, based
on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Aceto Corporation as of June 30, 2007 and 2006, and the related consolidated
statements of income and comprehensive income, stockholders' equity, and cash
flows for each of the years then ended and our report dated September 5, 2007,
expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Melville, New York
September 5, 2007
30
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated herein by reference to our definitive proxy statement to be filed
with the Securities and Exchange Commission with respect to our annual meeting
of shareholders scheduled to be held on December 6, 2007.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to our definitive proxy statement to be filed
with the Securities and Exchange Commission with respect to our annual meeting
of shareholders scheduled to be held on December 6, 2007.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Incorporated herein by reference to our definitive proxy statement to be filed
with the Securities and Exchange Commission with respect to our annual meeting
of shareholders scheduled to be held on December 6, 2007.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Incorporated herein by reference to our definitive proxy statement to be filed
with the Securities and Exchange Commission with respect to our annual meeting
of shareholders scheduled to be held on December 6, 2007.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated herein by reference to our definitive proxy statement to be filed
with the Securities and Exchange Commission with respect to our annual meeting
of shareholders scheduled to be held on December 6, 2007.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Report:
(a) The financial statements listed in the Index to Consolidated Financial
Statements are filed as part of this Annual Report. All financial
statement schedules have been included in the Consolidated Financial
Statements or Notes thereto.
(b) Exhibits
Exhibit
Number Description
------ -----------
3.1 Restated Certificate of Incorporation (incorporated by reference
to Exhibit 4(a)(iii) to Registration Statement No. 2-70623 on
Form S-8 (S-8 2-70623)).
3.2 Certificate of Amendment dated November 21, 1985 to Restated
Certificate of Incorporation (incorporated by reference to
Exhibit 3(ii) to the Company's annual report on Form 10-K for
the fiscal year ended June 30, 1986).
3.3 Amended and restated by-laws of Aceto Corporation, effective as
of February 2, 2005 (incorporated by reference to Exhibit 3.1 to
the Company's current report on Form 8-K dated February 2,
2005).
10.1 Aceto Corporation 401(k) Retirement Plan, effective August 1,
1997, as amended and restated as of July 1, 2002 (incorporated
by reference to Exhibit 10.1 to the Company's annual report on
Form 10-K for the fiscal year ended June 30, 2004).
31
10.2 Supplemental Executive Retirement Plan, as amended and restated,
effective June 30, 2004 and frozen as of December 31, 2004
(incorporated by reference to Exhibit 10.2 to the Company's
annual report on Form 10-K for the fiscal year ended June 30,
2004).
10.3 Aceto Corporation Stock Option Plan (as Amended and Restated
effective as of September 19, 1990) (and as further Amended
effective June 9, 1992) (incorporated by reference to Exhibit
10(v)(b) to the Company's annual report on Form 10-K for the
fiscal year ended June 30, 1992).
10.4 1998 Aceto Corporation Omnibus Equity Award Plan (incorporated
by reference to Exhibit 10(v) to the Company's annual report on
Form 10-K for the fiscal year ended June 30, 1999).
10.5 Aceto Corporation 2002 Stock Option Plan (incorporated by
reference to Exhibit 4(i) to Registration Statement No.
333-110653 on Form S-8).
10.6 Lease between Aceto Corporation and M. Parisi & Son Construction
Co., Inc. for office space at One Hollow Lane, Lake Success, NY
dated April 28, 2000 (incorporated by reference to Exhibit
10(vi) to the Company's annual report on Form 10-K for the
fiscal year ended June 30, 2000).
10.7 Lease between Aceto Corporation and M. Parisi & Son Construction
Co., Inc. for office space at One Hollow Lane, Lake Success, NY
dated April 28, 2000 (incorporated by reference to Exhibit
10(vi)(b) to the Company's annual report on Form 10-K for the
year ended June 30, 2000).
10.8 Lease between CDC Products Corp. and Seaboard Estates for
manufacturing and office space at 1801 Falmouth Avenue, New Hyde
Park, NY dated October 31, 1999 (incorporated by reference to
Exhibit 10(vi)(c) to the Company's annual report on Form 10-K
for the year ended June 30, 2000).
10.9 Stock Purchase Agreement among Windham Family Limited
Partnership, Peter H. Kliegman, CDC Products Corp. and Aceto
Corporation (incorporated by reference to Exhibit 10(vii) to the
Company's annual report on Form 10-K for the year ended June 30,
1999).
10.10 Asset Purchase Agreement among Magnum Research Corporation, CDC
Products Corp., Roy Gross and Aceto Corporation (incorporated by
reference to Exhibit 10 (viii) to the Company's annual report on
Form 10-K for the year ended June 30, 2000).
10.11 Asset Purchase Agreement between Schweizerhall, Inc. and Aceto
Corporation (incorporated by reference to Exhibit 10(ix) to the
Company's annual report on Form 10-K for the year ended June 30,
2000).
10.12 Purchase and Sale Agreement among Schweizerhall Holding AG,
Chemische Fabrik Schweizerhall, Schweizerhall, Inc., Aceto
Corporation and Aceto Holding B.V., I.O. (incorporated by
reference to Exhibit 2.1 to the Company's current report on Form
8-K dated April 4, 2001).
10.13 Loan Guarantee between Aceto Corporation and subsidiaries and
Deutsche Bank AG dated March 22, 2001 (incorporated by reference
to Exhibit 10.13 to the Company's annual report on Form 10-K for
the year ended June 30, 2001).
10.14 Credit Agreement between Aceto Corporation and subsidiaries and
JPMorgan Chase Bank dated May 10, 2002 (incorporated by
reference to Exhibit 10.13 to the Company's annual report on
Form 10-K for the year ended June 30, 2002).
10.15 Amendment and Waiver to Credit Agreement between Aceto
Corporation and subsidiaries and JPMorgan Chase Bank dated June
29, 2004 (incorporated by reference to Exhibit 10.15 to the
Company's annual report on Form 10-K for the year ended June 30,
2004).
10.16 Waiver to Credit Agreement between Aceto Corporation and
subsidiaries and JPMorgan Chase Bank dated August 31, 2004
(incorporated by reference to Exhibit 10.16 to the Company's
annual report on Form 10-K for the year ended June 30, 2004).
32
10.17 Share Purchase Agreement dated as of December 12, 2003 between
Aceto Holding GmbH and Corange Deutschland Holding GmbH
(incorporated by reference to Exhibit 2.1 to the Company's
current report on Form 8-K dated December 31, 2003).
10.18 Aceto Corporation Supplemental Executive Deferred Compensation
Plan, effective March 14, 2005 (incorporated by reference to
Exhibit 10.1 to the Company's current report on Form 8-K dated
March 14, 2005).
10.19 Form of purchase agreement between Shanghai Zhongjin Real Estate
Development Company Limited and Aceto (Hong Kong) Limited dated
November 10, 2004 (incorporated by reference to Exhibit 10.1 to
the Company's quarterly report on Form 10-Q for the quarter
ended December 31, 2004).
10.20* Amendment and Waiver to Credit Agreement between Aceto
Corporation and subsidiaries and JPMorgan Chase Bank dated June
26, 2007.
21.1* Subsidiaries of the Company.
23.1* Consent of BDO Seidman, LLP.
23.2* Consent of KPMG LLP.
31.1* Certification pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities and Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities and Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
----------
*Filed herewith
33
ACETO CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms 35
Consolidated financial statements:
Consolidated balance sheets as of June 30, 2007 and 2006 37
Consolidated statements of income for the years ended
June 30, 2007, 2006 and 2005 38
Consolidated statements of cash flows for the years ended
June 30, 2007, 2006 and 2005 39
Consolidated statements of shareholders' equity and
comprehensive income for the years ended
June 30, 2007, 2006 and 2005 40
Notes to consolidated financial statements 41
Schedules:
II - Valuation and qualifying accounts 63
All other schedules are omitted because they are not required or the
information required is given in the consolidated financial statements
or notes thereto.
34
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
Aceto Corporation:
We have audited the accompanying consolidated balance sheets of Aceto
Corporation and subsidiaries as of June 30, 2007 and 2006 and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and cash flows for the years then ended. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedule as listed in the accompanying index for the years ended June
30, 2007 and 2006. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements and the financial statement schedule. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aceto Corporation
and subsidiaries at June 30, 2007 and 2006, and the results of their operations
and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the financial statement schedule presents fairly, in all material
respects, the information set forth therein for the years ended June 30, 2007
and 2006.
We also have audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Aceto
Corporation and subsidiaries' internal control over financial reporting as of
June 30, 2007, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated September 5, 2007 expressed an
unqualified opinion.
/s/ BDO Seidman, LLP
Melville, New York
September 5, 2007
35
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
Aceto Corporation:
We have audited the accompanying consolidated statements of income,
shareholders' equity and comprehensive income, and cash flows of Aceto
Corporation and subsidiaries for the year ended June 30, 2005. In connection
with our audit of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index for the
year ended June 30, 2005. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Aceto Corporation and subsidiaries for the year ended June 30, 2005, in
conformity with U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Melville, New York
September 8, 2005
36
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2007 AND 2006
(in thousands, except per-share amounts)
2007 2006
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 32,320 $ 33,732
Investments 3,036 3,309
Trade receivables: less allowance for doubtful accounts (2007, $491;
2006, $416) 58,206 50,993
Other receivables 3,123 1,406
Inventory 60,679 47,259
Prepaid expenses and other current assets 1,128 1,011
Deferred income tax asset, net 2,541 3,396
--------- ---------
Total current assets 161,033 141,106
Long-term notes receivable 449 557
Property and equipment, net 4,406 4,808
Property held for sale 5,268 4,531
Goodwill 1,820 1,755
Intangible assets, net 5,817 3,789
Deferred income tax asset, net 5,958 7,356
Other assets 3,727 2,690
--------- ---------
TOTAL ASSETS $ 188,478 $ 166,592
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,539 $ 24,424
Short term bank loans 25 -
Note payable - related party 500 500
Accrued expenses 14,154 10,612
Deferred income tax liability 885 863
--------- ---------
Total current liabilities 48,103 36,399
Long-term liabilities 6,684 6,379
Environmental remediation liability 5,816 5,200
Deferred income tax liability 2,746 3,329
Minority interest 302 232
--------- ---------
Total liabilities 63,651 51,539
Commitments and contingencies (Note 16)
Shareholders' equity:
Common stock, $.01 par value, 40,000 shares authorized; 25,644 shares
issued; 24,330 and 24,278 shares outstanding at June 30, 2007 and 2006, 256 256
respectively
Capital in excess of par value 56,854 56,691
Retained earnings 74,419 68,464
Treasury stock, at cost, 1,314 and 1,366 shares at June 30, 2007 and
2006, respectively (12,693) (13,198)
Accumulated other comprehensive income 5,991 2,840
--------- ---------
Total shareholders' equity 124,827 115,053
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 188,478 $ 166,592
========= =========
See accompanying notes to consolidated financial statements.
37
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
2007 2006 2005
--------- --------- ---------
Net sales $ 313,473 $ 297,328 $ 313,431
Cost of sales 258,980 246,370 260,280
--------- --------- ---------
Gross profit 54,493 50,958 53,151
Selling, general and administrative expenses 39,429 38,529 41,561
--------- --------- ---------
Operating income 15,064 12,429 11,590
Other income (expense):
Interest expense (173) (127) (73)
Interest and other income, net 532 956 1,271
--------- --------- ---------
359 829 1,198
--------- --------- ---------
Income from continuing operations before income taxes 15,423 13,258 12,788
Provision for income taxes 5,211 3,994 2,163
--------- --------- ---------
Income from continuing operations 10,212 9,264 10,625
Loss from discontinued operations, net of income taxes (Note 3) - (27) (610)
--------- --------- ---------
Net income $ 10,212 $ 9,237 $ 10,015
========= ========= =========
Basic income per common share:
Income from continuing operations $ 0.42 $ 0.38 $ 0.44
Loss from discontinued operations - - (0.03)
--------- --------- ---------
Net income $ 0.42 $ 0.38 $ 0.41
Diluted income per common share:
Income from continuing operations $ 0.41 $ 0.38 $ 0.43
Loss from discontinued operations - - (0.02)
--------- --------- ---------
Net income $ 0.41 $ 0.38 $ 0.41
Weighted average shares outstanding:
Basic 24,305 24,267 24,198
Diluted 24,711 24,590 24,670
See accompanying notes to consolidated financial statements.
38
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands)
2007 2006 2005
-------- -------- --------
Operating activities:
Net income $ 10,212 $ 9,237 $ 10,015
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,791 1,558 1,291
Goodwill impairment charge relating to discontinued operations - - 920
Asset impairment charge - - 619
Gain on sale of assets - (66) (10)
Provision for doubtful accounts 132 38 352
Non-cash stock compensation 443 278 329
Unrealized gain on trading securities (180) (40) (110)
Income tax benefit on exercise of stock options - - 142
Deferred income taxes 1,692 1,134 650
Changes in assets and liabilities:
Investments - trading securities - - 341
Trade accounts receivable (6,973) (227) 3,110
Other receivables (1,726) 129 80
Income taxes receivable - - 232
Inventory (12,565) 4,909 (10,188)
Prepaid expenses and other current assets (96) (182) 401
Other assets (636) (719) (363)
Accounts payable 7,884 (3,962) (8,681)
Accrued expenses and other liabilities 4,185 3,941 99
-------- -------- --------
Net cash provided by (used in) operating activities 4,163 16,028 (771)
-------- -------- --------
Investing activities:
Purchases of investments (6,274) - (4,463)
Proceeds from sale of investments - 1,799 9,000
Maturities of investments 6,779 - -
Payments received on notes receivable 151 73 144
Issuance of notes receivable (75) - -
Purchase of intangible assets (2,468) - -
Purchases of property and equipment, net (704) (485) (4,195)
-------- -------- --------
Net cash (used in) provided by investing activities (2,591) 1,387 486
-------- -------- --------
Financing activities:
Proceeds from exercise of stock options 217 250 946
Excess income tax benefit on exercise of stock options 24 85 -
Payment of note payable - related party - - (500)
Payment of cash dividends (4,257) (3,637) (3,641)
Payments for purchases of treasury stock - (581) -
Borrowings (repayments) of short-term bank loans 25 (126) 126
-------- -------- --------
Net cash used in financing activities (3,991) (4,009) (3,069)
-------- -------- --------
Effect of foreign exchange rate changes on cash 1,007 376 (26)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (1,412) 13,782 (3,380)
Cash and cash equivalents at beginning of period 33,732 19,950 23,330
-------- -------- --------
Cash and cash equivalents at end of period $ 32,320 $ 33,732 $ 19,950
======== ======== ========
See accompanying notes to consolidated financial statements.
39
ACETO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(in thousands, except per-share amounts)
ACCUMULATED
CAPITAL IN OTHER
COMMON STOCK EXCESS OF RETAINED TREASURY STOCK COMPREHENSIVE
SHARES AMOUNT PAR VALUE EARNINGS SHARES AMOUNT INCOME TOTAL
-------------------------------------------------------------------------------------------
Balance at June 30, 2004 25,644 256 57,111 56,490 (1,526) (15,135) 1,544 100,266
Net income - - - 10,015 - - - 10,015
Other comprehensive income:
Change in fair value of cross currency
interest rate swaps - - - - - - 49 49
Foreign currency translation
adjustments - - - - - - (383) (383)
Unrealized loss on available for sale
investments - - - - - - (52) (52)
Additional minimum pension liability - - - - - - (21) (21)
---------
Comprehensive income: 9,608
---------
Stock issued pursuant to employee stock
incentive plans - - (74) - 41 408 - 334
Cash dividends ($0.11 per share) - - - (3,641) - - - (3,641)
Exercise of stock options - - (276) - 123 1,222 - 946
Tax benefit from exercise of stock options - - 142 - - - - 142
-------------------------------------------------------------------------------------------
Balance at June 30, 2005 25,644 256 56,903 62,864 (1,362) (13,505) 1,137 107,655
Net income - - - 9,237 - - - 9,237
Other comprehensive income:
Change in fair value of cross currency
interest rate swap - - - - - - 42 42
Foreign currency translation
adjustments - - - - - - 1,682 1,682
Unrealized loss on available for sale
investments - - - - - - (42) (42)
Additional minimum pension liability - - - - - - 21 21
---------
Comprehensive income: 10,940
---------
Stock issued pursuant to employee stock
incentive plans - - (66) - 20 219 - 153
Cash dividends ($0.15 per share) - - - (3,637) - - - (3,637)
Share-based compensation - - 188 - - - - 188
Purchases of treasury stock - - - - (96) (581) - (581)
Exercise of stock options - - (419) - 72 669 - 250
Tax benefit from exercise of stock options - - 85 - - - - 85
-------------------------------------------------------------------------------------------
Balance at June 30, 2006 25,644 256 56,691 68,464 (1,366) (13,198) 2,840 115,053
Net income - - - 10,212 - - - 10,212
Other comprehensive income:
Change in fair value of cross
currency interest rate swap - - - - - - 161 161
Foreign currency translation
adjustments - - - - - - 2,900 2,900
Unrealized gain on available for sale
investments - - - - - - 52 52
---------
Comprehensive income: 13,325
---------
Adjustment to adopt SFAS No. 158, net of tax
of $25 - - - - - - 38 38
Stock issued pursuant to employee stock
incentive plans - - (44) - 15 142 - 98
Cash dividends ($0.175 per share) - - - (4,257) - - - (4,257)
Share-based compensation - - 329 - - - - 329
Exercise of stock options - - (146) - 37 363 - 217
Tax benefit from exercise of stock options - - 24 - - - - 24
-------------------------------------------------------------------------------------------
Balance at June 30, 2007 25,644 $ 256 $ 56,854 $ 74,419 (1,314) ($ 12,693) $ 5,991 $ 124,827
See accompanying notes to consolidated financial statements.
40
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS
Aceto Corporation and subsidiaries ("Aceto" or the "Company") is primarily
engaged in the sourcing, regulatory support, marketing and distribution of
chemically derived pharmaceuticals, biopharmaceuticals, specialty chemicals and
crop protection products used principally as raw materials in the agricultural,
color, pharmaceutical, surface coating/ink and general chemical consuming
industries. Most of the chemicals distributed by the Company are purchased from
companies located outside the United States. The Company's customers are
primarily located throughout the United States, Europe and Asia.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiaries. In addition, the financial statements
of S.R.F.A. LLC, a joint-venture entity which is 50% owned by the Company and
commenced operations in April 2004, are included in the consolidated financial
statements in accordance with FASB Interpretation 46R, "Consolidation of
Variable Interest Entities" (FIN 46R). All significant inter-company balances
and transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses reported in those financial statements and the disclosure of
contingent assets and liabilities at the date of the financial statements. These
judgments can be subjective and complex, and consequently actual results could
differ from those estimates and assumptions. The Company's most critical
accounting policies relate to revenue recognition; allowance for doubtful
accounts; inventory; goodwill and other indefinite-life intangible assets;
long-lived assets; environmental matters and other contingencies; income taxes;
and stock-based compensation.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities at the time of purchase of three months or less to be cash
equivalents.
INVESTMENTS
The Company classifies investments in marketable securities as trading,
available-for-sale or held-to-maturity at the time of purchase and periodically
re-evaluates such classifications. Trading securities are carried at fair value,
with unrealized holding gains and losses included in earnings. Held-to-maturity
securities are recorded at cost and are adjusted for the amortization or
accretion of premiums or discounts over the life of the related security.
Unrealized holding gains and losses on available-for-sale securities are
excluded from earnings and are reported as a separate component of accumulated
other comprehensive income (loss) until realized. In determining realized gains
and losses, the cost of securities sold is based on the specific identification
method. Interest and dividends on the investments are accrued at the balance
sheet date.
INVENTORIES
Inventories, which consist principally of finished goods, are stated at the
lower of cost (first-in first-out method) or market. The Company writes down its
inventories for estimated excess and obsolete goods by an amount equal to the
difference between the carrying cost of the inventory and the estimated market
value based upon assumptions about future demand and market conditions.
ENVIRONMENTAL AND OTHER CONTINGENCIES
The Company establishes accrued liabilities for environmental matters and other
contingencies when it is probable that a liability has been incurred and the
amount of the liability is reasonably estimable. If the contingency is resolved
for an amount greater or less than the accrual, or the Company's share of the
contingency increases or decreases, or other
41
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
assumptions relevant to the development of the estimate were to change, the
Company would recognize an additional expense or benefit in the consolidated
statements of income in the period such determination was made.
PENSION BENEFITS
In connection with certain historical acquisitions in Germany, the Company
assumed defined benefit pension plans covering certain employees who meet
certain eligibility requirements. The net pension benefit obligations recorded
and the related periodic costs are based on, among other things, assumptions of
the discount rate, estimated return on plan assets, salary increases and the
mortality of participants. The obligation for these claims and the related
periodic costs are measured using actuarial techniques and assumptions.
Actuarial gains and losses are deferred and amortized over future periods. The
Company's plans are funded in conformity with the funding requirements of
applicable government regulations.
ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income as of June 30, 2007 and
2006 are as follows:
2007 2006
------- -------
Fair value of cross currency interest rate swaps $ (75) $ (236)
Cumulative foreign currency translation adjustments 6,070 3,170
Unrealized loss on available for sale investments (42) (94)
Adjustment to adopt SFAS No. 158 38 -
------- -------
Total $ 5,991 $ 2,840
======= =======
The currency translation adjustments are not adjusted for income taxes as they
relate to indefinite investments in non-US subsidiaries.
COMMON STOCK
On May 4, 2005, the Board of Directors of the Company authorized the extension
of the Company's stock repurchase program for an additional three years,
expiring in May 2008. Under the stock repurchase program, the Company is
authorized to purchase up to an additional 4,147 shares of common stock (4,051
shares available as of June 30, 2007), in open market or private transactions,
at prices not to exceed the market value of the common stock at the time of such
purchase.
On December 2, 2004, the Board of Directors of the Company declared a 3-for-2
stock split, effected in the form of a dividend, that was paid January 10, 2005
to shareholders of record on December 24, 2004. The Company transferred $80 to
common stock from capital in excess of par value, representing the aggregate par
value of the 8,073 shares issued.
STOCK OPTIONS
Prior to July 1, 2005, the Company accounted for stock-based employee
compensation under the intrinsic value method as outlined in the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations while disclosing pro-forma net income
and net income per share as if the fair value method had been applied in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation." Under the intrinsic value method, no
compensation expense was recognized if the exercise price of the Company's
employee stock options equaled or exceeded the market price of the underlying
stock on the date of grant. Since the Company had issued all stock option grants
with exercise prices equal to, or greater than, the market value of the common
stock on the date of grant, through June 30, 2005 no compensation cost was
recognized in the consolidated statements of income.
Effective July 1, 2005, the Company adopted SFAS No. 123(R), "Share-Based
Payment." SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion No.
25. SFAS 123(R) requires that all stock-based compensation be recognized as an
expense in the financial statements and that such costs be measured at the fair
value of the award. This statement was adopted using the modified prospective
method, which requires the Company to recognize compensation expense on a
42
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
prospective basis. SFAS 123(R) also requires that excess tax benefits related to
stock option exercises be reflected as financing cash inflows. Prior to the
adoption of SFAS 123(R), the Company presented all tax benefits related to
stock-based compensation as an operating cash inflow. The Company's policy is to
satisfy stock-based compensation awards with treasury shares.
In order to determine the fair value of stock options on the date of grant, the
Company uses the Black-Scholes option-pricing model, including an estimate of
forfeiture rates. Inherent in this model are assumptions related to expected
stock-price volatility, option term, risk-free interest rate and dividend yield.
While the risk-free interest rate and dividend yield are less subjective
assumptions that are based on factual data derived from public sources, the
expected stock-price volatility and option term assumptions require a greater
level of judgment.
The Company uses an expected stock-price volatility assumption that is based on
the historical daily price changes of the underlying stock which are obtained
from public data sources. For stock option grants issued during fiscal 2007 and
2006, an expected stock-price volatility of 57% and 50%, respectively, was used
based upon the historical volatility at the time of issuance. With regard to the
weighted-average option term assumption, for stock option grants issued during
fiscal 2007 and 2006, an expected option term assumption of 5.5 years was used
as determined under the "simplified" method prescribed in SEC Staff Accounting
Bulletin ("SAB") No. 107.
The following table illustrates the effect on net income and net income per
common share as if the Company had measured the compensation cost for the
Company's stock option programs under the fair value method for the fiscal year
ended June 30, 2005:
2005
----------
Net income - as reported $ 10,015
Add: Stock-based compensation included
in reported net income 329
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects (4,643)
----------
Net income - pro forma $ 5,701
==========
Net income per share:
Basic - as reported $ 0.41
Basic - pro forma $ 0.24
Diluted - as reported $ 0.41
Diluted - pro forma $ 0.23
Stock-based employee compensation expense under the fair value method for the
fiscal year ended June 30, 2005, includes $6,046, which represents the entire
fair value of 1,322 options granted to employees and 61 options granted to
directors in September 2004, all of which had an exercise price equal to or
greater than the market value of the common stock on the date of grant, as those
options were vested as of their date of grant.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment and
passage of title and risk of loss to the customer. The Company has no acceptance
or other post-shipment obligations and does not offer product warranties or
services to its customers.
Sales are recorded net of returns of damaged goods from customers, which
historically have been immaterial, and sales incentives offered to customers.
The Company's sales incentives consist primarily of volume incentive rebates.
The Company records such volume incentive rebates as the underlying revenue
transactions that result in progress by
43
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
the customer in earning the rebate are recorded, in accordance with Emerging
Issues Task Force (EITF) 01-09, "Accounting for Consideration Given by a Vendor
to a Customer (Including a Reseller of the Vendor's Products)."
SHIPPING AND HANDLING FEES AND COSTS
All amounts billed to a customer in a sales transaction related to shipping and
handling represent revenues earned and are included in net sales. The costs
incurred by the Company for shipping and handling are reported as a component of
cost of sales. Cost of sales also includes inbound freight, receiving,
inspection, warehousing, distribution network, and customs and duty costs.
NET INCOME PER COMMON SHARE
Basic income per common share is based on the weighted average number of common
shares outstanding during the period. Diluted income per common share includes
the dilutive effect of potential common shares outstanding. The Company's only
potential common shares outstanding are stock options, which resulted in a
dilutive effect of 406, 323 and 472 shares for the years ended June 30, 2007,
2006 and 2005, respectively. There were 1,443, 1,638 and 1,096 stock options
outstanding that were not included in the calculation of diluted income per
common share for the years ended June 30, 2007, 2006 and 2005, respectively
because their effect would have been anti-dilutive.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the straight
line method over the estimated useful lives of the related asset. Expenditures
for improvements that extend the useful life of an asset are capitalized.
Ordinary repairs and maintenance are expensed as incurred. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any related gains or losses are included in
income.
The components of property and equipment were as follows:
Estimated Useful
June 30, 2007 June 30, 2006 Life (Years)
------------- ------------- ------------
Machinery and equipment $ 964 $ 741 10
Shorter of asset life
Leasehold improvements 330 322 or lease term
Computer equipment and software 3,763 3,523 3-5
Furniture and fixtures 1,100 952 10
Automobiles 497 423 3
Building 3,015 3,015 20
------------- -------------
$9,669 $8,976
Accumulated depreciation and amortization 5,263 4,168
------------- -------------
$4,406 $4,808
============= =============
Property held for sale represents land and land improvements of $5,268 and
$4,531 at June 30, 2007 and 2006, respectively. During fiscal 2007 the Company
recorded an additional $737 to partially recognize the capitalized environmental
costs up to the fair value of the land and land improvements to the extent of
additional environmental remediation cost estimates in accordance with EITF 90-8
"Capitalization of Costs to Treat Environmental Contamination".
44
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Depreciation and amortization of property and equipment amounted to $1,067,
$943, and $749 for the years ended June 30, 2007, 2006, and 2005, respectively.
GOODWILL AND OTHER INTANGIBLES
Goodwill is calculated as the excess of the cost of purchased businesses over
the fair value of their underlying net assets. Other intangible assets
principally consist of customer relationships, patent license, EPA registrations
and related data, trademarks, purchased customer lists and covenants not to
compete. Goodwill and other intangible assets that have an indefinite life are
not amortized.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the
Company tests goodwill and other intangible assets for impairment on at least an
annual basis. Goodwill impairment exists if the net book value of a reporting
unit exceeds its estimated fair value. The impairment testing is performed in
two steps: (i) the Company determines impairment by comparing the fair value of
a reporting unit with its carrying value, and (ii) if there is an impairment,
the Company measures the amount of impairment loss by comparing the implied fair
value of goodwill with the carrying amount of that goodwill. To determine the
fair value of these intangible assets, the Company uses many assumptions and
estimates that directly impact the results of the testing. In making these
assumptions and estimates, the Company uses industry accepted valuation models
and set criteria that are reviewed and approved by various levels of management.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be generated by the
asset. Recoverability of assets held for sale is measured by comparing the
carrying amount of the assets to their estimated fair value. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
The Company accounts for derivatives and hedging activities under the provisions
of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
as amended, which establishes accounting and reporting guidelines for derivative
instruments and hedging activities. SFAS No. 133 requires the recognition of all
derivative financial instruments as either assets or liabilities in the
statement of financial condition and measurement of those instruments at fair
value. Changes in the fair values of those derivatives are reported in earnings
or other comprehensive income depending on the designation of the derivative and
whether it qualifies for hedge accounting. The accounting for gains and losses
associated with changes in the fair value of a derivative and the effect on the
consolidated financial statements depends on its hedge designation and whether
the hedge is highly effective in achieving offsetting changes in the fair value
or cash flows of the asset or liability hedged. Under the provisions of SFAS No.
133, the method that is used for assessing the effectiveness of a hedging
derivative, as well as the measurement approach for determining the ineffective
aspects of the hedge, is established at the inception of the hedged instrument.
For derivatives designated as fair value hedges, changes in fair value are
recognized in earnings. If the fair value hedge is fully effective, the change
in fair value of the hedged item attributable to the hedged risk is adjusted to
fair value and is also recognized in earnings. Changes in the fair value of a
derivative that is highly effective and that is designated and qualifies as a
cash flow hedge are recorded in other comprehensive income to the extent that
the derivative is effective as a hedge, until earnings are affected by the
variability in cash flows of the designated hedged item.
The Company enters into cross currency interest rate swaps to reduce foreign
currency exposure on inter-company transactions. The gains or losses on the
inter-company loans due to changes in foreign currency rates will be offset by
the gains or losses on the swap in the statements of income. Since the Company's
interest rate swaps qualify as cash flow hedging activities, the change in their
fair value is recorded in accumulated other comprehensive income.
45
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
The Company operates internationally, therefore its earnings, cash flows and
financial positions are exposed to foreign currency risk from
foreign-currency-denominated receivables and payables, which, in the U.S., have
been denominated in various foreign currencies, including Euros, British Pounds,
Japanese Yen, Singapore Dollars and Chinese Renminbi and at certain foreign
subsidiaries in U.S. dollars and other non-local currencies.
Management believes it is prudent to minimize the risk caused by foreign
currency fluctuation. Management minimizes the currency risk on its foreign
currency receivables and payables by purchasing future foreign currency
contracts (futures) with one of its financial institutions. Futures are traded
on regulated U.S. and international exchanges and represent commitments to
purchase or sell a particular foreign currency at a future date and at a
specific price. Since futures are purchased for the amount of the foreign
currency receivable or for the amount of foreign currency needed to pay for
specific purchase orders, and the futures mature on the due date of the related
foreign currency vendor invoices or customer receivables, the Company believes
that it eliminates risks relating to foreign currency fluctuation. The Company
takes delivery of all futures to pay suppliers in the appropriate currency. The
gains or losses for the changes in the fair value of the foreign currency
contracts are recorded in cost of sales (sales) and offset the gains or losses
associated with the impact of changes in foreign exchange rates on trade
payables (receivables) denominated in foreign currencies. Senior management and
members of the financial department continually monitor foreign currency risks
and the use of this derivative instrument.
FOREIGN CURRENCY
The functional currency of the Company's foreign subsidiaries is the applicable
local currency. The translation of the applicable foreign currencies into U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts and cash
flows using average rates of exchange prevailing during the year. Adjustments
resulting from the translation of foreign currency financial statements are
accumulated in a separate component of stockholders' equity.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period consolidated
financial statements to conform to the current year presentation.
(3) SALE OF INSTITUTIONAL SANITARY SUPPLIES SEGMENT
During June 2005, the Company entered into an agreement to sell the majority of
the product lines formulated and marketed by CDC Products Corp. ("CDC"), which
is one of the two reporting units forming part of the former Institutional
Sanitary Supplies reportable segment. The sale of certain product lines of CDC
was completed on August 24, 2005 for $75 and a note receivable of $44 due in
April 2006, which resulted in a pre-tax gain of $66, included in other income in
the statement of income for the year ended June 30, 2006. The Company recorded
an asset impairment charge relating to CDC of $619 included in selling, general
and administrative expenses in the consolidated statement of income for the year
ended June 30, 2005. The asset impairment charge related to certain leasehold
improvements which were deemed to have no future value and thus the Company
wrote-off those assets. Excluded from the sale of CDC's product lines was
Anti-Clog, an EPA-registered biocide that has a unique delivery system and is
used in commercial air-conditioning systems. Beginning in July 2005, the
operating results of the Anti-Clog product, which are not material, are included
in the Chemicals & Colorants reportable segment.
On September 6, 2005, the Company completed the sale of certain assets of Magnum
Research Corp. for $81, the remaining reporting unit of the former Institutional
Sanitary Supplies reportable segment, the operating results of which are
included in discontinued operations in the consolidated statements of income. In
December 2005, the Company exited the leased space previously occupied by CDC
and Magnum Research Corp. In June 2006, the Company negotiated a lease
termination with its landlord which resulted in a pre-tax charge of $378
included in selling, general and administrative expenses for the year ended June
30, 2006.
46
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Operating results of discontinued operations for the fiscal years ended June 30,
2006 and 2005 were as follows:
2006 2005
------- -------
Net sales $ 154 $ 1,314
------- -------
Loss from operations of discontinued
business
(44) (64)
Benefit for income taxes 17 24
Non-cash impairment charge - (920)
Benefit for income taxes - 350
------- -------
Loss from discontinued operations $ (27) $ (610)
======= =======
The $920 non-cash impairment charge included in the table of operating results
of discontinued operations for the fiscal year ended June 30, 2005 relates to a
write-down of goodwill, net of an income tax benefit, of $570 for Magnum
Research Corp., the remaining reporting unit that was sold, which was part of
the former Institutional Sanitary Supplies segment. The goodwill amount that was
written down had been previously allocated to this reportable segment.
(4) INVESTMENTS
A summary of short-term investments was as follows:
June 30, 2007 June 30, 2006
----------------------- ----------------------
Fair Value Cost Basis Fair Value Cost Basis
---------- ---------- ---------- ----------
Trading Securities
------------------
Corporate equity securities $ 877 $ 152 $ 697 $ 152
Available For Sale Securities
-----------------------------
Corporate bonds $ 1,187 $ 1,203 $ 1,167 $ 1,210
Government and agency securities $ 972 $ 1,000 $ 1,445 $ 1,501
---------- ----------
$ 3,036 $ 3,309
========== ==========
The Company has classified all investments with maturity dates of greater than
three months as current since it has the ability to redeem them within the year
and is available for current operations.
Unrealized gains on trading securities were $180, $40 and $110 for fiscal 2007,
2006 and 2005, respectively.
(5) NOTES RECEIVABLE
The Company has four notes receivable with outstanding balances aggregating $482
and $624 at June 30, 2007 and June 30, 2006, respectively, which have arisen
from sales of property. The notes are either secured by a first mortgage on the
real property sold or collateralized by a security interest in the asset sold.
The notes range in length from seven to ten years and earn interest at a fixed
rate. The range of fixed rates on the notes is 5.5% to 7.0%. Included in current
assets are the current portions of the notes receivable due within one year
totaling $74 and $67 at June 30, 2007 and 2006, respectively.
47
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(6) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill of $1,820 and $1,755 as of June 30, 2007 and June 30, 2006,
respectively, relates to the Health Sciences segment and reporting unit.
Intangible assets subject to amortization as of June 30, 2007 and 2006 were as
follows:
Gross Carrying Accumulated Net Book
Value Amortization Value
------ ------ ------
June 30, 2007
-------------
Customer relationships $2,958 $1,479 $1,479
Patent license 838 133 705
EPA registrations and related data 2,733 98 2,635
Non-compete agreements 247 173 74
------ ------ ------
$6,776 $1,883 $4,893
====== ====== ======
Gross Carrying Accumulated Net Book
Value Amortization Value
------ ------ ------
June 30, 2006
-------------
Customer relationships $2,755 $ 984 $1,771
Customer lists 600 600 -
Patent license 838 57 781
EPA registrations and related data 265 3 262
Non-compete agreements 230 115 115
------ ------ ------
$4,688 $1,759 $2,929
====== ====== ======
The estimated useful lives of customer relationships, patent license, EPA
registrations and related data and non-compete agreements are 7 years, 11 years,
10 years and 3-5 years, respectively.
As of June 30, 2007 and June 30, 2006, the Company also had $924 and $860,
respectively, of intangible assets pertaining to trademarks which have
indefinite lives and are not subject to amortization.
In fiscal 2007 and 2006, changes in goodwill and trademarks are attributable to
foreign currency exchange rates used to translate the financial statements of
foreign subsidiaries.
Amortization expense for intangible assets subject to amortization amounted to
$724, $615 and $542 for the years ended June 30, 2007, 2006 and 2005,
respectively. The estimated aggregate amortization expense for intangible assets
subject to amortization for each of the succeeding years ended June 30, 2008
through June 30, 2013 are as follows: 2008: $838; 2009: $813; 2010: $788; 2011:
$577; 2012: $366 and 2013 and thereafter: $1,511.
(7) ACCRUED EXPENSES
The components of accrued expenses as of June 30, 2007 and 2006 were as follows:
2007 2006
------- -------
Accrued compensation $ 3,749 $ 2,949
Accrued environmental remediation costs 321 200
Accrued income taxes payable 1,504 2,019
Other accrued expenses 8,580 5,444
------- -------
$14,154 $10,612
======= =======
48
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(8) ENVIRONMENTAL REMEDIATION
In May 2007, February 2007 and September 2006, the Company received letters from
the Pulvair Site Group, a group of potentially responsible parties ("PRP Group")
who are working with the State of Tennessee (the "State") to remediate a
contaminated property in Tennessee called the Pulvair site. The PRP Group has
alleged that one of Aceto's subsidiaries shipped hazardous substances to the
site which were released into the environment. The State had begun
administrative proceedings against the members of the PRP group and Aceto with
respect to the cleanup of the Pulvair site and the group has begun to undertake
cleanup. The PRP Group is seeking a settlement of approximately $2,100 from the
Company for its share to remediate the site contamination. Although the Company
acknowledges that its subsidiary shipped materials to the site for formulation
over twenty years ago, the Company believes that the evidence does not show that
the hazardous materials sent by Aceto's subsidiary to the site have
significantly contributed to the contamination of the environment. Accordingly,
the Company believes that the settlement offer is unreasonable. Alternatively,
counsel to the PRP Group has proposed that Aceto's subsidiary join it as a
participating member and pay 3.16% of the PRP Group's cost. The Company believes
that this percentage is high because it is based on the total volume of
materials that Aceto's subsidiary sent to the site, most of which were
non-hazardous substances and as such, believes that its subsidiary is a very
minor contributor to the site contamination. The impact of the resolution of
this matter on the Company's results of operations in a particular reporting
period is not known. However, management believes that the ultimate outcome of
this matter will not have a material adverse effect on the Company's financial
condition or liquidity.
The Company has environmental remediation obligations in connection with
Arsynco, Inc. ("Arsynco"), a subsidiary formerly involved in manufacturing
chemicals located in Carlstadt, New Jersey, which was closed in 1993 and is
currently held for sale. During fiscal 2007, based on continued monitoring of
the contamination at the site and the current proposed plan of remediation, the
Company received an estimate from an environmental consultant stating that the
costs of remediation could be between $6,136 and $7,611. As of June 30, 2007 and
2006 a liability of $6,136 and $5,400, respectively, is included in the
accompanying consolidated balance sheet. In accordance with EITF Issue 90-8,
"Capitalization of Costs to Treat Environmental Contamination" management
believes that the majority of costs incurred to remediate the site will be
capitalized in preparing the property which is currently classified as held for
sale. An appraisal of the fair value of the property by a third-party appraiser
supports this assumption. However, these matters, if resolved in a manner
different from those assumed in current estimates, could have a material adverse
effect on the Company's financial condition, operating results and cash flows
when resolved in a future reporting period.
In March 2006, Arsynco received notice from the EPA of its status as a
potentially responsible party ("PRP") under the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) for a site described as the
Berry's Creek Study Area. Arsynco is one of over 150 PRP's which have potential
liability for the required investigation and remediation of the site. The
estimate of the potential liability is not quantifiable for a number of reasons,
including the difficulty in determining the extent of contamination and the
length of time remediation may require. In addition, any estimate of liability
must also consider the number of other PRP's and their financial strength. Since
an amount of the liability can not be reasonably estimated at this time, no
accrual is recorded for these potential future costs. The impact of the
resolution of this matter on the Company's results of operations in a particular
reporting period is not known. However, management believes that the ultimate
outcome of this matter will not have a material adverse effect on the Company's
financial condition or liquidity.
(9) FINANCING ARRANGEMENTS
The Company has a revolving credit agreement with a financial institution that
expires June 30, 2010 and provides for available credit of $10,000. Under the
credit agreement, the Company may obtain credit through direct borrowings and
letters of credit. The obligations of the Company under the credit agreement are
guaranteed by certain of the Company's subsidiaries and are secured by 65% of
the capital of certain non-domestic subsidiaries which the Company owns. There
is no borrowing base on the credit agreement. Interest under the credit
agreement is at LIBOR plus 1.50%, which was 6.82%, 7.19% and 4.93% at June 30,
2007, 2006 and 2005, respectively. The credit agreement contains several
financial covenants requiring, among other things, minimum levels of debt
service and tangible net worth. The Company is also subject to certain
restrictive debt covenants including liens, limitations on indebtedness,
limitations on cash dividends, guarantees, sale of assets, sales of receivables,
and loans and investments. The Company was in compliance with all covenants at
June 30, 2007.
49
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
At June 30, 2007 and 2006, the Company had available lines of credit with
foreign financial institutions totaling $19,472 and $18,512, respectively. The
Company has issued a cross corporate guarantee to the foreign banks. Short term
loans under these agreements bear interest at LIBOR plus 0.75%, which was 6.07%,
6.44% and 4.18% at June 30, 2007, 2006 and 2005, respectively. The Company is
not subject to any financial covenants under these arrangements.
Under the above financing arrangements, the Company had $25 in short-term bank
loans outstanding and $702 in letters of credit leaving an unused facility of
$28,770 at June 30, 2007. At June 30, 2006 the Company had no short-term bank
loans outstanding and $1,349 in letters of credit leaving an unused facility of
$27,163.
(10) STOCK BASED COMPENSATION PLANS
In September 2002, the Company adopted the Aceto Corporation 2002 Stock Option
Plan ("2002 Plan"), which was ratified by the Company's shareholders in December
2002. Under the 2002 Plan, restricted stock or options to purchase up to 1,688
shares of the Company's common stock may be granted by the Company to officers,
directors, employees and agents of the Company. The exercise price per share
shall not be less than the market value of Aceto common stock on the date of
grant and each option may not become exercisable less than six months from the
date it is granted. Restricted stock may be granted to an eligible participant
in lieu of a portion of any annual cash bonus earned by such participant. Such
award may include additional shares of restricted stock (premium shares) greater
than the portion of bonus paid in restricted stock. The restricted stock award
is vested at issuance and the restrictions lapse ratably over a period of years
as determined by the Board of Directors, generally three years. The premium
shares vest when all the restrictions lapse, provided that the participant
remains employed by the Company at that time.
During the year ended June 30, 2007, the Company granted 65 options to certain
employees and directors at a weighted average exercise price of $8.25 per share.
The options vest on the first anniversary of the date of grant and expire ten
years from the date of grant.
In January 2006, the Company granted 131 options to certain employees and
directors at an exercise price of 6.82 per share. The options vest on the first
anniversary of the date of grant and expire ten years from the date of grant.
All options granted were at exercise prices equal to the market value of the
common stock on the date of grant. As of June 30, 2007, there were 94 shares of
common stock available for grant as either options or restricted stock under the
2002 Plan.
In December 1998, the Company adopted the Aceto Corporation 1998 Omnibus Equity
Award Plan ("1998 Plan"). In accordance with the 1998 Plan the Company's Board
of Directors ("Board") may grant up to 1,688 shares of common stock in the form
of stock options or restricted stock to eligible participants. The exercise
price per share, determined by the Board, for options granted cannot be less
than the market value of the stock on the date of grant. The options vest as
determined by the Board and expire no later than ten years from the date of
grant. Restricted stock may be granted to an eligible participant in lieu of a
portion of any annual cash bonus earned by such participant. Such restricted
stock award may include premium shares greater than the portion of bonus paid in
restricted stock. The restricted stock award is vested at issuance and the
restrictions lapse ratably over a period of years as determined by the Board.
The premium shares vest when the restrictions lapse, provided that the
participant remains employed by the Company at that time. Under the 1998 Plan,
there were 67 shares of common stock available for grant as either options or
restricted stock at June 30, 2007.
Under the terms of the Company's 1980 Stock Option Plan, as amended ("1980
Plan"), options may be issued to officers and key employees. The exercise price
per share can be greater or less than the market value of the stock on the date
of grant. The options vest either immediately or over a period of years as
determined by the Board of Directors and expire no later than five or ten years
from the original date they are fully vested. The 1980 Plan expired September
2005. Outstanding options survive the expiration of the 1980 Plan.
In September 2004, the Company granted 1,317 options under the 1980 Plan to
employees, 64 options under the 1998 Plan to directors and employees and 2
options under the 2002 Plan to employees at an exercise price of $10.95 per
share which was equal to the market value of the common stock on the date of
grant. These options were vested as of their date of grant and will expire ten
years from such date.
50
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
The following summarizes the shares of common stock under option for all plans
at June 30, 2007, 2006 and 2005, and the activity with respect to options for
the respective years then ended:
Weighted average Aggregate
Shares subject to exercise price per Intrinsic
option share Value
-----------------------------------------
Balance at June 30, 2004 1,632 $ 4.72
Granted 1,383 10.95
Exercised (171) 5.18
Forfeited (80) 9.62
-------------------------------------------------------------------------------
Balance at June 30, 2005 2,764 7.65
Granted 131 6.82
Exercised (72) 3.88
Forfeited (80) 10.65
-------------------------------------------------------------------------------
Balance at June 30, 2006 2,743 7.62
Granted 65 8.25
Exercised (38) 6.02
Forfeited (70) 10.26
-------------------------------------------------------------------------------
Balance at June 30, 2007 2,700 $ 7.58 $6,499
-------------------------------------------------------------------------------
Options exercisable at June 30, 2007 2,635 $ 7.57 $6,434
The total intrinsic value of stock options exercised during the years ended June
30, 2007, 2006 and 2005 was approximately $106, $234 and $1,045, respectively.
At June 30, 2007, outstanding options had expiration dates ranging from December
10, 2008 to April 30, 2017.
Under the 2002 Plan and the 1998 Plan, compensation expense is recorded for the
market value of the restricted stock awards in the year the related bonus is
earned and over the vesting period for the market value at the date of grant of
the premium shares granted. In fiscal 2007, 2006 and 2005, restricted stock
awarded and premium shares vested of 15, 20 and 41 common shares, respectively,
were issued from treasury stock under employee incentive plans, which increased
stockholders' equity by $98, $153 and $334, respectively. The related non-cash
compensation expense related to the restricted stock granted and the vesting of
premium shares during the year, which are issuable only when fully vested, was
$114, $90 and $329 in fiscal 2007, 2006 and 2005, respectively. Additionally,
non-cash compensation expense of $329 and $188 was recorded in fiscal 2007 and
2006, respectively, relating to stock option grants, which is included in
selling, general and administrative expenses.
The following summarizes the non-vested stock options at June 30, 2007 and the
activity with respect to non-vested options for the year ended June 30, 2007:
Shares Weighted
subject to average grant
option date fair value
--------------------------------
Non-vested at June 30, 2006 130 $ 2.87
Granted 65 3.96
Vested (129) 2.87
Forfeited (1) 2.87
--------------------------------
Non-vested at June 30, 2007 65 $ 3.96
51
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Non-cash compensation expense for non-vested options at June 30, 2007 of $109
will be expensed during fiscal 2008. The per-share weighted-average fair value
of stock options granted during 2007, 2006 and 2005 was $3.96, $2.87 and $4.38,
respectively, on the date of the grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Expected Expected Risk-free
Date of Grant Volatility (%) Life (years) interest rate Dividend yield
--------------------------------------------------------------------------------
FISCAL 2007:
July 2006 57 5.5 4.36 2.22
December 2006 57 5.5 4.40 1.80
March 2007 58 5.5 4.50 1.90
April 2007 57 5.5 5.02 2.50
FISCAL 2006:
January 2006 50 5.5 4.36 2.22
FISCAL 2005:
September 2004 40 6.0 3.76 1.04
(11) INTEREST AND OTHER INCOME
Interest and other income during fiscal 2007, 2006 and 2005 was comprised of the
following:
2007 2006 2005
------- ------- -------
Dividends $ 64 $ 133 $ 86
Interest 1,045 590 459
Net gain on investments 174 29 117
Foreign government subsidies received 152 561 457
Minority interest (70) (61) (14)
Foreign currency (losses) gains (770) (354) 182
Miscellaneous (63) 58 (16)
------- ------- -------
$ 532 $ 956 $ 1,271
======= ======= =======
(12) INCOME TAXES
The components of income from continuing operations before the provision for
income taxes are as follows:
2007 2006 2005
-------- -------- --------
Domestic operations $ 2,988 $ 1,981 $ (332)
Foreign operations 12,435 11,277 13,120
-------- -------- --------
$ 15,423 $ 13,258 $ 12,788
======== ======== ========
52
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
The components of the provision for income taxes are as follows:
2007 2006 2005
------- ------- -------
Federal:
Current $ 788 $ 105 $ 293
Deferred 208 335 (692)
State and local:
Current 270 187 126
Deferred 6 126 (184)
Foreign:
Current 2,461 2,568 1,023
Deferred 1,478 673 1,597
------- ------- -------
$ 5,211 $ 3,994 $ 2,163
======= ======= =======
Income taxes payable, which is included in accrued expenses, was $1,504 and
$2,019 at June 30, 2007 and 2006, respectively.
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at June 30, 2007 and 2006 are presented below:
2007 2006
-------- --------
Deferred tax assets:
Accrued environmental remediation liabilities not
currently deductible $ 461 $ 461
Accrued deferred compensation 1,360 1,159
Additional inventoried costs for tax purposes 168 124
Allowance for doubtful accounts receivable 132 116
Depreciation and amortization - 223
Other 80 53
Impairment charges 196 585
Domestic net operating loss carryforwards 333 376
Foreign net operating loss carryforwards 8,738 10,695
-------- --------
Total gross deferred tax assets 11,468 13,792
Valuation allowances (2,502) (2,450)
-------- --------
8,966 11,342
-------- --------
Deferred tax liabilities:
Foreign deferred tax liabilities (3,631) (4,192)
Unrealized gain on investments (313) (207)
Goodwill (143) (383)
Depreciation and amortization (11) -
-------- --------
Total gross deferred tax liabilities (4,098) (4,782)
-------- --------
Net deferred tax assets $ 4,868 $ 6,560
======== ========
53
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
The following table shows the current and non current deferred tax assets
(liabilities) at June 30, 2007 and 2006:
2007 2006
---------------------
Current deferred tax assets, net $ 2,541 $ 3,396
Non-current deferred tax assets, net 5,958 7,356
Current deferred tax liabilities (885) (863)
Non current deferred tax liabilities (2,746) (3,329)
---------------------
Net deferred tax assets $ 4,868 $ 6,560
=====================
The net change in the total valuation allowance for the year ended June 30, 2007
was an increase of $52. This increase was primarily attributable to an
additional valuation allowance recorded for net operating loss carryforwards
generated in certain foreign jurisdictions. The net change in the total
valuation allowance for the year ended June 30, 2006 was an increase of $697,
primarily attributable to an additional valuation allowance recorded for net
operating loss carryforward generated in certain foreign jurisdictions. A
valuation allowance is provided when it is more likely than not that some
portion, or all, of the deferred tax assets will not be realized. The Company
has established valuation allowances primarily for net operating loss
carryforwards in certain foreign countries. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets are not expected to be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which net operating
loss carryforwards are utilizable and temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. In order to fully realize the net deferred tax assets recognized at
June 30, 2007, the Company will need to generate future taxable income of
approximately $11,100.
Based upon the level of historical taxable income and projections for taxable
income over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences. There can be no assurance, however, that the
Company will generate any earnings or any specific level of continuing earnings
in the future. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries amounting to approximately $61,400 at June 30, 2007 since
substantially all of these earnings are expected to be permanently reinvested in
foreign operations. A deferred tax liability will be recognized when the Company
expects that it will recover these undistributed earnings in a taxable manner,
such as through the receipt of dividends or sale of the investments.
Determination of the amount of unrecognized deferred U.S. income tax liabilities
is not practical to calculate because of the complexity of this hypothetical
calculation. In addition, unrecognized foreign tax credit carryforwards would be
available to reduce a portion of such U.S. tax liability.
We operate in various tax jurisdictions, and although we believe that we have
provided for income and other taxes in accordance with the relevant regulations,
if the applicable regulations were ultimately interpreted differently by a
taxing authority, we may be exposed to additional tax liabilities.
Tax reform has taken place in Germany whereby an income tax law was passed in
July 2007, awaiting approval into the Federal Gazette. The enacted tax rate in
Germany will potentially change from 40% to 30%. As a result, the deferred tax
balance could decrease by $1,600 in 2008.
54
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
A reconciliation of the statutory federal income tax rate and the effective tax
rate for continuing operations for the fiscal years ended June 30, 2007, 2006
and 2005 follows:
2007 2006 2005
---- ---- ----
Federal statutory tax rate 34.0% 34.0% 34.0%
State and local taxes, net of federal income tax
benefit 1.1 1.0 (0.5)
Increase (reduction) in valuation allowance 0.4 5.3 (9.9)
Foreign tax rate differential (2.1) (9.1) (5.6)
Other 0.4 (1.1) (1.1)
---- ---- ----
Effective tax rate 33.8% 30.1% 16.9%
==== ==== ====
At June 30, 2007, the Company had foreign net operating loss carryforwards of
approximately $16,600 which are available to offset future foreign taxable
income and which have no expiration date.
(13) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes during fiscal 2007, 2006 and 2005 was as
follows:
2007 2006 2005
------- ------- -------
Interest $ 167 $ 129 $ 151
Income taxes, net of refunds $ 3,822 $ 797 $ 195
(14) RETIREMENT PLANS
DEFINED CONTRIBUTION PLANS
The Company has defined contribution retirement plans in which certain employees
are eligible to participate, including deferred compensation plans (see below).
The Company's annual contribution per employee, which is at management's
discretion, is based on a percentage of the employee's compensation. The
Company's provisions for contributions amounted to $1,281, $1,148 and $1,161 in
fiscal 2007, 2006 and 2005, respectively.
DEFINED BENEFIT PLANS
The Company sponsors certain defined benefit pension plans covering certain
employees of its German subsidiaries who meet the plan's eligibility
requirements. In September 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS
No. 158"). SFAS No. 158 requires that employers recognize on a prospective basis
the funded status of their defined benefit pension and other postretirement
plans on their consolidated balance sheet and recognize as a component of other
comprehensive income, net of tax, the gains or losses and prior service costs or
credits that arise during the period but are not recognized as components of net
periodic benefit cost. SFAS No. 158 also requires additional disclosures in the
notes to financial statements. The Company adopted the recognition and
disclosure provisions of this statement for the year ended June 30, 2007. The
incremental effect of applying SFAS No. 158 on individual line items in the
consolidated balance sheet at June 30, 2007 is as follows:
55
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Prior to SFAS SFAS No. 158 After SFAS No.
No. 158 adoption No. 158
adoption adjustments adoption
------------ ------------ --------------
Accrued pension liability 874 (63) 811
Deferred income tax liability 2,721 25 2,746
Total liabilities 63,689 (38) 63,651
Accumulated other comprehensive income 5,953 38 5,991
Total shareholders' equity 124,789 38 124,827
The accrued pension liability as of June 30, 2007 was $811. The accrued pension
liability recorded as of June 30, 2006 amounted to $755. Net periodic pension
costs, which consists principally of interest cost and service cost was $73 in
fiscal 2007, $87 in fiscal 2006 and $84 in fiscal 2005. The Company's plans are
funded in conformity with the funding requirements of the applicable government
regulations. An assumed weighted average discount rate of 5.1%, 4.2% and 4.6%
and a compensation increase rate of 3.2%, 3.3% and 3.0% were used in determining
the actuarial present value of benefit obligations as of June 30, 2007, 2006 and
2005, respectively.
DEFERRED COMPENSATION PLANS
To comply with the requirements of the American Jobs Creation Act of 2004, as of
December 2004, the Company froze its non-qualified Supplemental Executive
Retirement Plan (the "Frozen Plan") and has not allowed any further deferrals or
contributions to the Frozen Plan after December 31, 2004. All of the earned
benefits of the participants in the Frozen Plan as of December 31, 2004, will be
preserved under the existing plan provisions.
On March 14, 2005, the Company's Board of Directors adopted the Aceto
Corporation Supplemental Executive Deferred Compensation Plan (the "Plan"). The
Plan is a non-qualified deferred compensation plan intended to provide certain
qualified executives with supplemental benefits beyond the Company's 401(k)
plan, as well as to permit additional deferrals of a portion of their
compensation. The Plan is intended to comply with the provisions of section 409A
of the Internal Revenue Code of 1986, as amended, and is designed to provide
comparable benefits to those under the Frozen Plan. Substantially all
compensation deferred under the Plan, as well as Company contributions, is held
by the Company in a grantor trust, which is considered an asset of the Company.
The assets held by the grantor trust are in life insurance policies.
As of June 30, 2007 and 2006, the Company recorded a liability under the Plans
of $3,523 and $2,937, respectively, (included in long-term liabilities) and an
asset (included in other assets) of $3,008 and $2,556, respectively, primarily
representing the cash surrender value of policies owned by the Company.
(15) FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
At June 30, 2007 and 2006 the Company had future foreign currency contracts that
have a notional amount of $13,793 and $12,389, respectively. Unrealized (losses)
gains on hedging activities at the end of fiscal 2007 and 2006 amounted to ($20)
and $171, respectively and are included in the consolidated statements of
income. The contracts have varying maturities of less than one year.
The Company is exposed to credit losses in the event of non-performance by the
financial institutions, who are the counter parties, on its future foreign
currency contracts. The Company anticipates, however, that the financial
institutions will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral to support financial
instruments, but monitors the credit standing of the financial institutions.
56
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
In addition, the Company enters into cross currency interest rate swaps to
reduce foreign currency exposure on inter-company transactions. In June 2004, a
foreign subsidiary of the Company entered into a one-year cross currency
interest rate swap transaction, which expired in June 2005 when the underlying
inter-company loan was repaid, and in May 2003 the foreign subsidiary entered
into a five-year cross currency interest rate swap transaction, both for the
purpose of hedging fixed-interest-rate, foreign-currency-denominated cash flows
under inter-company loans. Under the terms of these derivative financial
instruments, U.S. dollar fixed principal and interest payments to be received
under inter-company loans will be swapped for EURO denominated fixed principal
and interest payments. The change in fair value of the swaps from the date of
purchase to June 30, 2007, was $(75). The gains or losses on the inter-company
loans due to changes in foreign currency rates will be offset by the gains or
losses on the swap in the statements of income. Since the Company's interest
rate swaps qualify as hedging activities, the change in their fair value,
amounting to $161, $42 and $49 in 2007, 2006 and 2005, respectively, is recorded
in accumulated other comprehensive income.
OFF-BALANCE SHEET RISK
Commercial letters of credit are issued by the Company during the ordinary
course of business through major banks as requested by certain suppliers. The
Company had open letters of credit of approximately $702 and $1,349 as of June
30, 2007 and 2006, respectively. The terms of these letters of credit are all
less than one year. No material loss is anticipated due to non-performance by
the counter parties to these agreements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of all financial instruments classified as a current asset
or current liability are deemed to approximate fair value because of the short
maturity of these instruments. The difference between the fair value of
long-term notes receivable and their carrying value at both June 30, 2007 and
2006 was not material. The fair value of the Company's notes receivable was
based upon current rates offered for similar financial instruments to the
Company.
BUSINESS AND CREDIT CONCENTRATION
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of trade receivables. The Company's
customers are dispersed across many industries and are located throughout the
United States as well as in Mexico, Brazil, Malaysia, France, Canada, Germany,
Australia, the United Kingdom, the Netherlands and other countries. The Company
estimates an allowance for doubtful accounts based upon the credit worthiness of
its customers as well as general economic conditions. Consequently, an adverse
change in those factors could affect the Company's estimate of this allowance.
The Company as a policy does not require collateral from its customers. At June
30, 2007 and 2006, no single customer accounted for as much as 10% of net trade
accounts receivable.
No single product or customer accounted for as much as 10% of net sales in
fiscal 2007, 2006 or 2005. Two suppliers accounted for 13% and 12% of purchases
in fiscal 2005.
During the fiscal years ended June 30, 2007, 2006 and 2005, approximately 65%,
67% and 68%, respectively, of the Company's purchases came from Asia and
approximately 21%, 21% and 22%, respectively, came from Europe.
The Company maintains operations located outside of the United States. Net
assets located in Europe and Asia approximated $31,559 and $32,560, respectively
at June 30, 2007. Net assets located in Europe and Asia approximated $23,444 and
$28,165, respectively at June 30, 2006.
One of the Company's crop protection products is subject to certain licensed
technology, which expired in August 2007. The Company has commenced a lawsuit
against the owner of the patent license bringing claims based on antitrust and
breach of contract and related claims. The Company intends to pursue these
claims vigorously in order to continue to license the technology and sell the
particular crop protection product. For the year end June 30, 2007, 2006 and
2005, net sales from this crop protection product were $3,244, $4,832 and
$5,939, respectively.
(16) COMMITMENTS AND CONTINGENCIES
As of June 30, 2007, the Company has outstanding purchase obligations totaling
$71,891 with suppliers to the Company's domestic and foreign operations to
acquire certain products for resale to third party customers.
57
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
The Company and its subsidiaries are subject to various claims which have arisen
in the normal course of business. The impact of the final resolution of these
matters on the Company's results of operations in a particular reporting period
is not known. Management is of the opinion, however, that the ultimate outcome
of such matters will not have a material adverse effect upon the Company's
financial condition or liquidity.
In May 2007, February 2007 and September 2006, the Company received letters from
the Pulvair Site Group, a group of potentially responsible parties ("PRP Group")
who are working with the State of Tennessee (the "State") to remediate a
contaminated property in Tennessee called the Pulvair site. The PRP Group has
alleged that one of Aceto's subsidiaries shipped hazardous substances to the
site which were released into the environment. The State had begun
administrative proceedings against the members of the PRP group and Aceto with
respect to the cleanup of the Pulvair site and the group has begun to undertake
cleanup. The PRP Group is seeking a settlement of approximately $2,100 from the
Company for its share to remediate the site contamination. Although the Company
acknowledges that its subsidiary shipped materials to the site for formulation
over twenty years ago, the Company believes that the evidence does not show that
the hazardous materials sent by Aceto's subsidiary to the site have
significantly contributed to the contamination of the environment. Accordingly,
the Company believes that the settlement offer is unreasonable. Alternatively,
counsel to the PRP Group has proposed that Aceto's subsidiary join it as a
participating member and pay 3.16% of the PRP Group's cost. The Company believes
that this percentage is high because it is based on the total volume of
materials that Aceto's subsidiary sent to the site, most of which were
non-hazardous substances and as such, believes that its subsidiary is a very
minor contributor to the site contamination. The impact of the resolution of
this matter on the Company's results of operations in a particular reporting
period is not known. However, management believes that the ultimate outcome of
this matter will not have a material adverse effect on the Company's financial
condition or liquidity.
The Company has environmental remediation obligations in connection with
Arsynco's former manufacturing facility located in Carlstadt, New Jersey, which
was closed in 1993 and is currently held for sale. During fiscal 2007, based on
continued monitoring of the contamination at the site and the current proposed
plan of remediation, the Company received an estimate from an environmental
consultant stating that the costs of remediation could be between $6,136 and
$7,611. As of June 30, 2007 a liability of $6,136 is included in the
accompanying consolidated balance sheet. However, these matters, if resolved in
a manner different from those assumed in current estimates, could have a
material adverse effect on the Company's financial condition, operating results
and cash flows when resolved in a future reporting period.
In connection with the environmental remediation obligation for Arsynco, the
Company has filed a claim against BASF Corporation (BASF), the former owners of
the Arsynco property. The Company alleges that BASF is liable for a portion of
the cost to remediate, however, since collection is uncertain at this time, no
asset has been recorded.
In March 2006, Arsynco received notice from the EPA of its status as a PRP under
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA) for a site described as the Berry's Creek Study Area. Arsynco is one of
over 150 PRP's which have potential liability for the required investigation and
remediation of the site. The estimate of the potential liability is not
quantifiable for a number of reasons, including the difficulty in determining
the extent of contamination and the length of time remediation may require. In
addition, any estimate of liability must also consider the number of other PRP's
and their financial strength. Since an amount of the liability can not be
reasonably estimated at this time, no accrual is recorded for these potential
future costs. The impact of the resolution of this matter on the Company's
results of operations in a particular reporting period is not known. However,
management believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company's financial condition or liquidity.
One of the Company's subsidiaries was a defendant in a legal action alleging
patent infringement. The patent in question covered a particular method of
applying one of the products in the Company's Crop Protection segment. In
September 2005, shortly before a trial was expected to begin, the parties agreed
to a settlement. Under the terms of the settlement agreement, the Company was
obligated to pay $1,375, of which $625 was paid in December 2005 and the
remaining $750 will be paid in equal installments over the next five years. As
of June 30, 2007, the balance is $450. As a result of the settlement, the
company recorded an intangible asset of $838 for the patent license, which will
be amortized over its remaining life of 11 years, and a charge of $537, included
in SG&A expense, for the fiscal year ended June 30, 2006.
A subsidiary of the Company markets certain agricultural chemicals which are
subject to the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA). FIFRA
requires that test data be provided to the Environmental Protection Agency (EPA)
to register, obtain and maintain approved labels for pesticide products. The EPA
requires that follow-on registrants of these
58
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
products compensate the initial registrant for the cost of producing the
necessary test data on a basis prescribed in the FIFRA regulations. Follow-on
registrants do not themselves generate or contract for the data. However, when
FIFRA requirements mandate that new test data be generated to enable all
registrants to continue marketing a pesticide product, often both the initial
and follow-on registrants establish a task force to jointly undertake the
testing effort. The Company is presently a member of three such task force
groups and historically, our payments have been in the range of $250 - $500 per
year. The Company may be required to make additional payments in the future.
The Company leases office facilities in the United States, the Netherlands,
Germany, France, China and Singapore expiring at various dates between December
2007 and April 2011. In addition, a domestic subsidiary leases a manufacturing
facility under an operating lease expiring December 2009.
At June 30, 2007, the future minimum lease payments for each of the five
succeeding years and in the aggregate are as follows:
Fiscal year Amount
-------------------------------
2008 $ 1,543
2009 1,389
2010 1,155
2011 835
2012 78
Thereafter 74
--------
$ 5,074
========
Total rental expense amounted to $1,672, $1,651 and $1,760 for fiscal 2007, 2006
and 2005, respectively.
In June 2006, the Company negotiated a lease termination with its landlord for
the facility previously occupied by CDC and Magnum. In connection with the lease
termination, the landlord and a third party entered into a long-term lease for
which the Company guaranteed the rental payments by the third party through
September 30, 2009. The aggregate future rental payments of the third party that
are guaranteed by the Company are $925 and the fair value of this guarantee is
deemed to be insignificant.
(17) RELATED PARTY TRANSACTIONS
Certain directors of the Company are affiliated with law firms that serve as
legal counsel to the Company on various corporate matters. During fiscal 2007,
2006 and 2005, the Company incurred legal fees of $329, $315 and $215,
respectively, for services rendered to the Company by those law firms.
In November 2003, the Company formed a joint venture with Nufarm Americas, Inc.
(Nufarm), a subsidiary of Australia-based Nufarm Limited. Each company owns 50%
of the joint venture, named S.R.F.A., LLC. In June 2004, Nufarm and the Company
each loaned $1,000 to S.R.F.A., with those loans being evidenced by demand notes
that bear interest at 3.0% per annum. During fiscal 2005, S.R.F.A. repaid $500
of principal to each of Nufarm and the Company. The amounts due Nufarm at June
30, 2007 and 2006 are included as a note payable in the accompanying
consolidated balance sheets.
(18) OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board's ("FASB") EITF issued
EITF 06-3, "How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation)." The Task Force determined that the presentation of certain
taxes on either a gross basis (included in revenues and expenses) or a net basis
(excluded from revenues) is an accounting policy decision that should be
disclosed. An entity is not required to re-evaluate its existing policies
related to taxes assessed by a governmental authority. However, an entity is
required to disclose the amounts of such taxes reported on a gross basis. The
Company has adopted EITF 06-3 and reports these taxes on a net basis.
59
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48 "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement 109". FIN 48
prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken or expected to be
taken on a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006. Management is currently assessing the impact of FIN 48 on the
consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 establishes a common definition for fair value to
be applied to US GAAP guidance requiring use of fair value, establishes a
framework for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. Management is currently assessing the impact of SFAS No. 157
on the consolidated financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an Amendment of FASB
Statement No. 115" (" SFAS No. 159"). SFAS No. 159 allows companies the choice
to measure many financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings at each subsequent reporting date. The
provisions of SFAS No. 159 will be effective for fiscal years beginning after
November 15, 2007. Management is currently evaluating the impact of SFAS No. 159
on the consolidated financial position and results of operations.
(19) SEGMENT INFORMATION
The Company's business is organized along product lines into three principal
segments: Health Sciences, Chemicals & Colorants and Crop Protection.
HEALTH SCIENCES - includes the active ingredients for generic pharmaceuticals,
vitamins, and nutritional supplements, as well as products used in preparing
pharmaceuticals, primarily by major innovative drug companies, and
biopharmaceuticals. Health Sciences also includes Aceto branded vaccines for
companion animals and finished dosage form generic drugs.
CHEMICALS & COLORANTS - includes a variety of specialty chemicals used in
plastics, resins, adhesives, coatings, food, flavor additives, fragrances,
cosmetics, metal finishing, electronics, air-conditioning systems and many other
areas. Dye and pigment intermediates are used in the color-producing industries
such as textiles, inks, paper, and coatings. Organic intermediates are used in
the production of agrochemicals.
CROP PROTECTION - includes herbicides, fungicides and insecticides that control
weed growth as well as control the spread of insects and other microorganisms
that can severely damage plant growth. Also includes a sprout inhibitor for
potatoes and an herbicide for sugar cane. The Company changed the name of this
segment from Agrochemicals to Crop Protection in 2007 to more accurately portray
the markets in which we do business.
The former Institutional Sanitary Supplies segment reported in prior years,
which included cleaning solutions, fragrances and deodorants for commercial and
industrial customers, was successfully divested from the Company's ongoing
business. During June 2005, the Company entered into an agreement to sell the
majority of the product lines formulated and marketed by CDC, which was one of
the two reporting units forming the Institutional Sanitary Supplies reportable
segment. The sale of certain product lines of CDC was completed on August 24,
2005. Excluded from the sale of CDC's product lines was Anti-Clog, an
EPA-registered biocide that has a unique delivery system and is used in
commercial air-conditioning systems, the results of which are included in the
Chemicals & Colorants segment. On September 6, 2005, the Company completed the
sale of certain assets of Magnum Research Corp., the remaining reporting unit
forming part of the former Institutional Sanitary Supplies reportable segment,
the operating results of which are included in discontinued operations in the
consolidated statements of income.
The Company's chief operating decision maker evaluates performance of the
segments based on net sales and gross profit. The Company does not allocate
assets by segment because the chief operating decision maker does not review the
assets by segment to assess the segments' performance, as the assets are managed
on an entity-wide basis.
60
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Health Chemicals & Crop Institutional Consolidated
Sciences Colorants Protection Sanitary Supplies Totals
-------- ----------- ----------- ----------------- ------------
2007
----
Net sales $ 170,691 $ 123,299 $ 19,483 - $ 313,473
Net gross profit 33,007 16,556 4,930 - 54,493
2006
----
Net sales $ 166,725 $ 110,869 $ 19,734 - $ 297,328
Gross profit 32,313 17,144 4,760 - 54,217
Unallocated cost of sales (1) (3,259)
---------
Net gross profit $ 50,958
=========
2005
----
Net sales $ 184,577 $ 104,777 $ 20,031 $ 4,046 $ 313,431
Gross profit 32,886 17,257 6,719 696 57,558
Unallocated cost of sales (1) (4,407)
---------
Net gross profit $ 53,151
=========
(1) Prior to July 2006, certain freight and storage costs were not able to be
allocated to the segments. Effective July 2006, as a result of certain system
improvements, all freight and storage costs are allocated to a particular
segment. Therefore, the unallocated portion of certain freight and storage costs
for the year ended June 30, 2007 have now been identified to the segments as
presented above. Total Company gross profit and margin were not affected by this
change in allocation of costs. However, the comparison of gross profit by
segment will be affected by the change in allocation of these costs.
Net sales by source country for the years ended June 30, 2007, 2006 and 2005 and
long-lived assets by location as of June 30, 2007 and 2006 were as follows:
NET SALES GROSS PROFIT LONG-LIVED ASSETS
-------------------------------- -------------------------------- --------------------
2007 2006 2005 2007 2006 2005 2007 2006
-------- -------- -------- -------- -------- -------- -------- --------
United States $184,391 $184,395 $183,447 $ 29,779 $ 30,348 $ 29,179 $ 5,229 $ 3,033
Germany 68,484 56,464 63,518 17,371 14,311 13,041 3,826 4,061
Netherlands 8,579 10,095 8,018 1,594 1,791 1,686 73 179
France 16,812 15,543 12,609 1,973 1,808 1,561 68 80
Asia-Pacific 35,207 30,831 45,839 3,776 2,700 7,684 2,847 2,999
-------- -------- -------- -------- -------- -------- -------- --------
Total $313,473 $297,328 $313,431 $ 54,493 $ 50,958 $ 53,151 $ 12,043 $ 10,352
======== ======== ======== ======== ======== ======== ======== ========
Sales generated from the United States to foreign countries amounted to $35,540,
$29,152 and $26,111 for the fiscal years ended June 30, 2007, 2006 and 2005,
respectively.
61
ACETO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2007, 2006 AND 2005
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(20) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of the unaudited quarterly results of operations for
the years ended June 30, 2007 and 2006.
For the quarter ended
--------------------------------------------------------
September 30, December 31, March 31, June 30,
FISCAL YEAR ENDED JUNE 30, 2007 2006 2006 2007 2007
--------------------------------------------------------
Net sales $74,725 $75,686 $75,879 $87,183
Gross profit 12,561 12,562 12,876 16,494
Net income 2,462 1,744 1,800 4,206
Net income per diluted share $ 0.10 $ 0.07 $ 0.07 $ 0.17
For the quarter ended
--------------------------------------------------------
September 30, December 31, March 31, June 30,
FISCAL YEAR ENDED JUNE 30, 2006 2005 2005 2006 2006
--------------------------------------------------------
Net sales $75,046 $69,498 $80,915 $71,869
Gross profit 12,556 11,500 13,513 13,389
Net income 1,974 1,547 2,751 2,965
Net income per diluted share $ 0.08 $ 0.06 $ 0.11 $ 0.12
The net income per common share calculation for each of the quarters is based on
the weighted average number of shares outstanding in each period. Therefore, the
sum of the quarters in a year does not necessarily equal the year's net income
per common share.
62
Schedule II
ACETO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended June 30, 2007, 2006 and 2005
(dollars in thousands)
Balance at Charged to Charged to
beginning of costs and other Balance at
Description year expenses accounts Deductions end of year
----------------------------------------------------------------------------------------------------------
Year ended June 30, 2007
Allowance for doubtful accounts $ 416 $ 132 - $ 57(a) $ 491
====== ====== ======== ======
Year ended June 30, 2006
Allowance for doubtful accounts $ 427 $ 38 - $ 49(a) $ 416
====== ====== ======== ======
Year ended June 30, 2005
Allowance for doubtful accounts $1,033 $ 343 - $ 949(a) $ 427
====== ====== ======== ======
(a) Specific accounts written off as uncollectible.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ACETO CORPORATION
By: /s/ Leonard S. Schwartz
----------------------------
Leonard S. Schwartz
Chairman, President and
Chief Executive Officer
Date: September 6, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Leonard S. Schwartz Chairman, President and 09-06-07
---------------------- Chief Executive Officer
Leonard S. Schwartz (Principal Executive Officer)
/s/ Douglas Roth Secretary/Treasurer and 09-06-07
---------------------- Chief Financial Officer
Douglas Roth (Principal Financial and
Accounting Officer)
/s/ Stanley Fischer Director 09-06-07
----------------------
Stanley Fischer
/s/ Robert Wiesen Director 09-06-07
----------------------
Robert Wiesen
/s/ Ira S. Kallem Director 09-06-07
----------------------
Ira S. Kallem
/s/ Albert L. Eilender Director 09-06-07
----------------------
Albert L. Eilender
/s/ Hans C. Noetzli Director 09-06-07
----------------------
Hans C. Noetzli
/s/ William Britton Director 09-06-07
----------------------
William Britton
64
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation (incorporated by reference
to Exhibit 4(a)(iii) to Registration Statement No. 2-70623 on
Form S-8 (S-8 2-70623)).
3.2 Certificate of Amendment dated November 21, 1985 to Restated
Certificate of Incorporation (incorporated by reference to
Exhibit 3(ii) to the Company's annual report on Form 10-K for
the fiscal year ended June 30, 1986).
3.3 Amended and restated by-laws of Aceto Corporation, effective as
of February 2, 2005 (incorporated by reference to Exhibit 3.1 to
the Company's current report on Form 8-K dated February 2,
2005).
10.1 Aceto Corporation 401(k) Retirement Plan, effective August 1,
1997, as amended and restated as of July 1, 2002 (incorporated
by reference to Exhibit 10.1 to the Company's annual report on
Form 10-K for the fiscal year ended June 30, 2004).
10.2 Supplemental Executive Retirement Plan, as amended and restated,
effective June 30, 2004 and frozen as of December 31, 2004
(incorporated by reference to Exhibit 10.2 to the Company's
annual report on Form 10-K for the fiscal year ended June 30,
2004).
10.3 Aceto Corporation Stock Option Plan (as Amended and Restated
effective as of September 19, 1990) (and as further Amended
effective June 9, 1992) (incorporated by reference to Exhibit
10(v)(b) to the Company's annual report on Form 10-K for the
fiscal year ended June 30, 1992).
10.4 1998 Aceto Corporation Omnibus Equity Award Plan (incorporated
by reference to Exhibit 10(v) to the Company's annual report on
Form 10-K for the fiscal year ended June 30, 1999).
10.5 Aceto Corporation 2002 Stock Option Plan (incorporated by
reference to Exhibit 4(i) to Registration Statement No.
333-110653 on Form S-8).
10.6 Lease between Aceto Corporation and M. Parisi & Son Construction
Co., Inc. for office space at One Hollow Lane, Lake Success, NY
dated April 28, 2000 (incorporated by reference to Exhibit
10(vi) to the Company's annual report on Form 10-K for the
fiscal year ended June 30, 2000).
10.7 Lease between Aceto Corporation and M. Parisi & Son Construction
Co., Inc. for office space at One Hollow Lane, Lake Success, NY
dated April 28, 2000 (incorporated by reference to Exhibit
10(vi)(b) to the Company's annual report on Form 10-K for the
year ended June 30, 2000).
10.8 Lease between CDC Products Corp. and Seaboard Estates for
manufacturing and office space at 1801 Falmouth Avenue, New Hyde
Park, NY dated October 31, 1999 (incorporated by reference to
Exhibit 10(vi)(c) to the Company's annual report on Form 10-K
for the year ended June 30, 2000).
10.9 Stock Purchase Agreement among Windham Family Limited
Partnership, Peter H. Kliegman, CDC Products Corp. and Aceto
Corporation (incorporated by reference to Exhibit 10(vii) to the
Company's annual report on Form 10-K for the year ended June 30,
1999).
10.10 Asset Purchase Agreement among Magnum Research Corporation, CDC
Products Corp., Roy Gross and Aceto Corporation (incorporated by
reference to Exhibit 10 (viii) to the Company's annual report on
Form 10-K for the year ended June 30, 2000).
10.11 Asset Purchase Agreement between Schweizerhall, Inc. and Aceto
Corporation (incorporated by reference to Exhibit 10(ix) to the
Company's annual report on Form 10-K for the year ended June 30,
2000).
10.12 Purchase and Sale Agreement among Schweizerhall Holding AG,
Chemische Fabrik Schweizerhall, Schweizerhall, Inc., Aceto
Corporation and Aceto Holding B.V., I.O. (incorporated by
reference to Exhibit 2.1 to the Company's current report on Form
8-K dated April 4, 2001).
65
10.13 Loan Guarantee between Aceto Corporation and subsidiaries and
Deutsche Bank AG dated March 22, 2001 (incorporated by reference
to Exhibit 10.13 to the Company's annual report on Form 10-K for
the year ended June 30, 2001).
10.14 Credit Agreement between Aceto Corporation and subsidiaries and
JPMorgan Chase Bank dated May 10, 2002 (incorporated by
reference to Exhibit 10.13 to the Company's annual report on
Form 10-K for the year ended June 30, 2002).
10.15 Amendment and Waiver to Credit Agreement between Aceto
Corporation and subsidiaries and JPMorgan Chase Bank dated June
29, 2004 (incorporated by reference to Exhibit 10.15 to the
Company's annual report on Form 10-K for the year ended June 30,
2004).
10.16 Waiver to Credit Agreement between Aceto Corporation and
subsidiaries and JPMorgan Chase Bank dated August 31, 2004
(incorporated by reference to Exhibit 10.16 to the Company's
annual report on Form 10-K for the year ended June 30, 2004).
10.17 Share Purchase Agreement dated as of December 12, 2003 between
Aceto Holding GmbH and Corange Deutschland Holding GmbH
(incorporated by reference to Exhibit 2.1 to the Company's
current report on Form 8-K dated December 31, 2003).
10.18 Aceto Corporation Supplemental Executive Deferred Compensation
Plan, effective March 14, 2005 (incorporated by reference to
Exhibit 10.1 to the Company's current report on Form 8-K dated
March 14, 2005).
10.19 Form of purchase agreement between Shanghai Zhongjin Real Estate
Development Company Limited and Aceto (Hong Kong) Limited dated
November 10, 2004 (incorporated by reference to Exhibit 10.1 to
the Company's quarterly report on Form 10-Q for the quarter
ended December 31, 2004).
10.20* Amendment and Waiver to Credit Agreement between Aceto
Corporation and subsidiaries and JPMorgan Chase Bank dated June
26, 2007.
21.1* Subsidiaries of the Company.
23.1* Consent of BDO Seidman, LLP.
23.2* Consent of KPMG LLP.
31.1* Certification pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities and Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities and Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
----------
* Filed herewith
66